Porter's Model of Generic Competitive Strategies_图文

Porter's Model ofBy Orges Ormanidhi and Omer SiringaGeneric CompetitiveStrategiesAN INSIGHTFUL AND CONVENIENT APPROACH TO FIRMS' ANALYSISA firms competitive behavior is an important topic forpractitioners, theorists, and policy makers. Among the ex-planations offirms^ behavior is Michael Porter's have presented this model along with some alternativeapproaches: Structure-Conduct-Performance, the New In-dustrial Organization and Game Theory, the Resource-Based Perspective, and Market Process Economics. Theseapproaches are discussed in terms of their relations, simi-larities, and differences relative to Porter's model. In ourcomparative discussion, tve support the use of Porterasmodel to evaluate firms' competitive behavior. Our reasonsfor this support are this model's popularity, well-definedstructure, feasibility, clarity, simplicity, generality., and itscomplementarity to two other main approaches. We findthe Porter model to be a convenient approach to the firm'scompetitive advantage and Ormanidhi is a research asso-ciate in a joint appointment at tlieUniversity of Toronto and the Univer-sity of Guelph. Earlier, he worked asan economic analyst with the On-tario Ministry of Finance. He alsoworked at Oxford Outcomes, Oxford Internet Institute in theUnited Kingdom, Statistics Nonvay,and the university of Tirana in Albania, //¿s research inter-ests include firms' competitive behavior, heath economicmodeling and enaluation, productivity, and panic Stringa if dean of the Facultyof Economy, University of Tirana, apost that he aho held aver 1996 -1998, where he first became a fac-ulty memher of the Department ofApplied Mathematics in 1973 andProfessor in 2002. His varied re-search intere.'iLH include transition is-sues in Albania, including economicreform and fiscal ami monetary policies. Earlier researchhas included portfolio optimization., queuing nwdels, andenergy effectiveness. Educated at tke University of Tirana,he has a B.S. in mathematics, a B.A. in finance, and aPh.D. in applied statistics in firms compete and what strategies theychoose are important questions for the econ-omy. Sound answers to such questions helpexplain individual firms' successful and un-successful competitive moves and positionsand further the understanding of the causes of better andworse perfonnance. Improved understanding of firms' com-petitiveness would also serve as input to improve policiesconcerning competition and related issues; and improvedpolicies will, in turn, provide valuable support to efforts tocontinuously develop markets and businesses. Finallv. atih article draws on the thesis ihat Orges Onnan¡dh¡ «loEefor his Masters of Philosophy from Staffordshire 's Model of Generic Competitive StrategiesBusiness Economics • Jiih 2008 55

a more aggregate level, this understanding can also servefor informed comparisons in domestic as well as interna-tional contexts by better assessing fímis' competitive be-havior across different industries or the importance of competition, an importantstrand of the literatiue has focused on the identification ofthe most successful competitive strategies that firms pur-sue. A vtell-known framework within this literature, espe-cially among business strategists and industrial economists,is Porter's model (1980, 1998, and 2004). This approach,presented in section 1, is the focus of our discussion in thisarticle. Porter proposes that if firms pursue any of his threerecommended generic competitive strategies they will beable to outperform competitors who do not pursue recommended strategies are "lower cost" or "costleadership," "differentiation," and "focus;" and "focus" canbe found in three variants—"cost focus," "differentiationfocus," or "cost and differentiation focus." In section 1, fourother approaches—Structure-Conduct-Performance, NewIndustrial Organization and Game Theory, Resource-BasedPerspective, and Market Process Economics—are alsobriefly presented. We have chosen to concentrate onPorter's model because we view it as an insightful and con-venient approach to the analysis of firm's competitive be-havior. Our reasons for this are the model's popularity, welldefined structure, feasibility, clarity, simplicity and pre-sumed generality, and its complementarity to two othermain approaches in terms ofthe aggregate level of analysis.1. Porter's Model and Other ApproachesStructure-Conduct-Performant-ements in the SCP approach include:• the impact of structure on conduct;• the impact of stmcture on performance; and• the impact of conduct on r, among these, the most important relationshipis that between the structure of industries and fimis' per-formance. As far as performance is concerned, marketpower is assumed to be positively related to the higher (lower) the market power the higher (lower)the profitability. For example, utilizing data from the cturing industry over 1936-1940, Bain (1951)found support for the hypothesis that profitability of firmsin highly concentrated industries is larger than in less con-centrated ones. In a more recent study. Mueller and Rau-nig (1999) tested whether the results obtained from thestandard SCF model differ depending on the degree of het-erogeneity of the firms in industries. An important refine-ment to the classical SCP model that can be derived by thefindings of tliis study is that the causal relationship betweenconcentration and performance postulated by SCP propo-sitions would hold in homogeneous rather than heteroge-neous structure was considered as exogenous in theSCP paradigm, the most important factors related to struc-ture were barriers to entry. In the 1993 reprint of the firstedition of Bain (1956, pp. 53-166), three main factors areconsidered as entry barriers: economies of scale, productdifferentiation advantages, and absolute cost r and Raunig(1999. p. 317), also note that: "•... ourresults do not imply that market structure is irrelevant whenevaluating performance and policies for heterogeneous in-dustries. What we have shown is that industry concentra-tion is not systematically associated with profitability inthese industries. ... Indeed, the one variable that is signif-icantly correlated with profitability in the heterogeneousindustries is advertising intensity, which is often interpretedas a component of entry barriers."However, the assumed exogenous nature of structurehas often been an object of the critique of SCP since it isbelieved that, in practice, firms' actions (conduct) and prof-itability (performance) are considered to influence marketstructure. More recent extensions to account for endogene-ity include efforts to divide entry barriers into exogenousand endogenous. For example, Shepherd (1990, p. 274)lists 14 factors as the common cause of entry barriers. Ex-ogenous (economic or intrinsic) causes of barriers includecapital requirements, economies of scale, product differ-entiation, absolute cost advantages, diversification, re-search and development intensity, high durability offirm-specific capital, and vertical integration. Endogenous(voluntary and strategic) causes of barriers include retali-Before presenting Porter's model, we start with a briefdescription of the Structure-Conduct-Performance (SCP)paradigm since it can be considered as a classical approachand has also served as a benchmark or starting point formany economists who developed other approaches pre-sented here.^ SCF was the main approach from the 1950sto the 1970s. As the name suggests, it consists of threemain elements:• structure of industries, mainiy defined by the degree ofconcentration, market share distribution, etc.;• conduct of firms, which involves firms' actions in termsof their price setting, advertisement spending, technol-ogy, etc.;• performance of firms/industries, mainly defined bymeasures of profitability but which were especially re-lated to the extent of market three main causal relationships among these ele-Thanks to one of the anonymous refereeB for pointing this out.56 Business Economics • July 2008Porter's Model oj Generic Competitive Strategies

ation and pre-emptive actions, excess capacity, selling ex-penses (including advertising), patents, control over olherstrategic resources, and "packing the product space."Delorme et al. (2002) provide an empirical examplethat accounts for endogeneity, utilizing data from the cturing industry for 1982,1987. and 1992. Apply-ing a simultaneous equations framework to study the rela-tionships between structure, conduct, and performance,their main findings are:• stnicture does not depend on performance, which sup-ports the assumed exogenous nature of structure foundin classical SCP;• structure affects performance but not conduct; and• performance does not depend on gh exogeneity of structure would be supportedin this study, these findings confirm only one out of threefune StrategiesEcorumiir.s • Juh 2008 57

strategies. Hence, the position denoted by Sin Figure 1 is not the only non-recommendedoption. Positions along the inner lines, al-PORTERS MODEL OF GENERIC COMPETITIVE STRATEGIESthough not directly discussed by Porter,STRATEGIC ADVANTAGEwhich we have denoted by AS, BS and CS,(COMPETITIVE ADVANTAGE)should also be considered as non-recom-Uniqueness perceivedmended customersLow cosí positionCompared to the SCP model presented(Differentiation)(Lower cost)above. Porter's work has some similaritiesl)Ut, more importantly, differs with SCP interms of the main object of the LEADERSHIPDIFFERENTIATIONORSimilar to SCP, Porter recognizes the impor-'S 'SLOWER COSTtani'e of industiy structure on both firm's be-n £havior and performance; but differently froms«t- ÜJSCP, Porter views industry structure ando >firms' actions as mutually dependent. As faras industry stnicture is concerned, despitesimilarities. Porter has also extended itsFOCUSscope with the "extended rivalry" concept.a) Cost Focus; b) Differentiation Focus;c) Cost and Differentiation FocusHowever, more importantly, the main objectin Porter's analysis is the firm or ihe firm'scompetitive behavior, whereas the main ob-Sources: Porter (1980, p, 39|; Porter (1985, p, 121''ject of SCP is tlie context in which competi-tion occurs. While in the SCP the role of theiinns shoulfl pursue the rnoders recommended strategiesfimi is understated, in Porter's work it is spelled out andin order lo achieve higher profitability than their competi-analyzed as the most important source of superior per-tors. The strategic alternative that Porter specifically recommend is dubhed by him "stuck in ihe middle,"which is the position we have illustrated by the circle S inAlternatit'e Approachesthe figure. Porter's prescription is that the choices amongIn tliis section we discuss some alternative approaches lothe generic strategies are mutually exclusive if a firm is tostrategy and competitive advantage of firms, drawing on theachieve above-average by Foss and Mahnke (1998). They categorize these ap-proaches into two main areas, the equilibrium-based and theWhile explaining his three main strategic alternatives,market prix^ess. Ilie equilibrium-based category includesPorter asserts that: "Effectively implementing any of thesethree groups, which are: the industry analysis approach as-generic strategies usually requires total commitment andsociated with Michael Porter (1980), ap[)roaches based onsupporting organizational arrangements that are diluted ifthe new industrial organizaliiro, 1989), and the resoiux;e-In the new introduction to the 1998 edition of his 1980liased (>erspective (Demsetz, 1973; Wemerfelt, 1984; Bar-book, he reinforced (his by stating that: "Another misutî-ney, 1986, 1991).^derstanding revolves around the need to choose betweenlow cost and differentiation. My fwsition is that being theThe market process category, according to Foss andlowest cost producer and being truly differentiated andMalmke (1998, p. 13), is considered to be a non-equilibriumcommanding a price premium are rarely compatible. Suc-based approach, under "... the banner of 'market processcessful strategies require choice or they can be easily imi-economics' (Boettke and Pryt^hitko, 1998). This line oftated. Becoming 'stuck in the middle'—the phrase 1thought includes the Austrian school of ect)nomics (e.g..introduced—is a recipe for disaster" (Porter, 1998, p. xiv).Mises, 1949; Hayek, 194«; Kimier, 1973; Uchmann, 1986),The same ideas are maintained in his 2004 edition as evolutionary (Nelson and Winter, 1982), Schumf»eterianI he main implication of Porter's arguments is that, ex-(Schumpeter, 1934), and post-Marshallian economicscept in rare and nevertheless temporary cases, a firm can-' Tn the 1998 and 2004 editions of the model of generit; successfully pursue a combination of recommendedII'The terminology in parentheses is maiiily from Porter (1985.)Porter, however, notes that nothing like equilibrium comlitioní^ wasmeant in his analysis.58 Bu~' Economics • July 2008Purler's Model ofCetieric Compétitive Strategies

(I/íashy, 1991), as well as some contrihutions utilizing a moreiomial, neoclassical character {e.g., Fisher, 1983)."New Industrial Organization and Game TheoryAs ihe heading suggests, tiie new industrial organiza-tion approach is closely linked to the concepts of game ihe-ory in analyzing firm's strategic behavior. The term"strategic" in the tenninology of game theory implies in-terdependence—firms' hehavior affecting each other's per-formance, e.g., profits. From a game-theoretic perspective,competitors solve a specified game that has an equilibriumcondition in the form of Nash equilibrium or its refinements(sub-game perfection). In the rontexl of firm strategy, theneed for this refinement is that while the Nash equilibriumspecifies equilibrium conditions based on ex ante evalua-tions, some of these conditions do not imply rationality (-game Nash equilibrium) in ex post an example of this, which relates to Porter's analy-sis of industry, we present the following simple game in Fig-ure 2, where a potential entrant, "E", and an incumbent."I", decide on iheir strategic moves. In this game "E" de-cides whether to enter the industry or not and "I" decideswhether to retaliate by engaging in a price war. The fie-FIGURE 2ifies ex ante evaluations, where "E" stays out of the indus-try with the belief that "I" will retahate by engaging in aprice war. In the case of the belief that "I" will choose "Re-taliation" the rational choice for "E" is to choose "NotEnter" as opposed to "Enter." However, if "E" would in-deed enter the industry, the choice of "Retaliation" by "I"would be based on an irrational behavior because in suchcase "I" would be better off by choosing "No Retaliation."For "[". while "Retaliation" would be rational in ex anteevaluations {or in one-shot game settings), it is not so once"Enter" by "E" is in place since it is "No Retaliation" thatis the rational choice in such ex post situations (or in dy-namic game settings). This aiso means that only Eq2 is asub-game perfect Nash equilibrium.''In relation to Porter's analysis, the first type of equilib-rium {Eql) could be the case when existing firms are cred-ible in their threats to retaliate against the potentialentrants, which relates to his discussion of one of the fivecompetitive forces noted earlier, i.e. the "threat of newentry." More generally, Eql type of equilibrium would holdif the structure of entry barriers is such that in tiie event ofentry firms believe that everybody, or at least the potentialentrant, is worse off. However, when it comes to ex post sit-uations and entry has been made, the second type of ecpii-libriurn (Eq2) is Hkely to be the Porter's model holds, as long as firms pursue his rec-ommended strategies, for example, "E" and "I" could pur-sue "lower cost," but without necessarily engaging in afierce price war. This would imply E<¡2 ds the sub-gameNash equilibrium.^ As long as "E" is able t« earn profitswhen entering ihe industry, the game illustiated can be eas-ily extended to allow for fimis to choose among tbe otberPorter-recommended strategies. In case Porter's modelholds, tbe pursuit of these strategies would reward firmswith higher than average profitability {which directly re-lates to profits assuming equal rapilal/investmenl require-ments), though not necessarily with equal profit entry, E(¡2 would be .stable for as long as bothfirms earn more than in a retaliatory situation, which, innThe discussion hased on Figure 2 rcff^rs U» an pntry-rflalialion situa-lion where finris behave (;oini)elilively lo eani profits, r;xrliiiliiig rollu-sive behavior. Ahoul ihis. Gabszcwicz (1999) states thai: "... ont- mustadiniL tliat several obstacles may arise lo prevent ihe Hevelopniient of iheKnlry seenario invented by economisls. Some are related to spt-i^ific cir-cumstances, (»there to ihe strategic behavior of incumbent finns. Buttliere is another way for firms to avoid profil enision, namely bymeans of collusion" (p. 9).'One additional point thai we would bring here is that entry is assumedlo be non-costly, or that the rewards are net of costs. For our purposeshere, we will assume ihat enlry is non-costly or net of costs but noteihiit "entry deterrent i>riee" is also a (concept that Porter refers to wben(ng "threat of new entry." If entry cost.s are significant, thegame-theoretic outcomes will be different, wbieb could also imply otherequilibia.A DESCRIPTION OF AN ENTRY ANDRETALIATIONGAMENot Enter J^0; 100,000No

Retatiation;f^^'^^^'RO 000'50,000^^ Enter^^*^"^"^ Retaliation10,000;-10.000tionai outcomes, say profits, are given on tbe right of thearrows that end the game, where the first (left) outcome isfor "E" and the second (right) one for "1."Given the setting in Figure 2, there are two INasb equi-libria, Eql: ("Not Enter"; "Ketaliation"), and Eq2:{"Enter"; "No Retaliation"). Once "E" has entered the in-dustry, both "E" and "F" would prefer to be in Eq2, whichsfx^cifies "Enter" for "E" and "No Retaliation" for "I", asopposed to a position where "E" chooses "Enter" and "I"chooses "Retaliation." Hence, in ex post situations, Eq2involves rational choices for l>oth the other hand, it might not always be straightfor-ward to see what Eql implies for firms' behavior. Eql spec-Porter's Model of Generic Competitive StrategiesBusiness Econamics • July 2008 ^

another example of Porter's analysis,, could happen if oneHrm has chosen "differentiation" and the other one "lowercost." In the case of more than two firms, referring loPorter's analysis, the situation would translate into choicesamong the recommended and non-recommended Porter is right, those finns that choose recommended op-tions are better off, as long as all firms do not simultane-ously choose "Retaliation" type of choices. With firmheterogeneity, fimis with superior performance based onPorter's prescription choose their unit costs, degrees of dif-ferentiation, or relevant strategic targets, but not necessar-ily the same for each Foss and Mahnke acknowledge the advance-ment that game theory has brought into the analysis offirms' competitive behavior through its tools based on log-ical reasoning, they do criticize this approach on thegrounds of the specification of equilibrium. According totheir study, since equilibrium is given from the outset (giventhat games consist of sophisticated players who anticipateeach other's actions) it leaves no room for disequilibriumsituations, such as entrepreneurial discoveries or manage-rial change to create new opportunities. Explicitly, theystate that; ''Most notably, there is no notion of an entrepre-neurial discovery procedure fKirzner 1973), in the sensethat firm managers are not supposed to discover and act onnew opportunities in the market. Everything is essentiallygiven from the beginning and specified hy the analyst"(Foss and Mahnke. 1998, p. 6).Based on this description ofthe role of game theory asthe core ofthe new industrial organization,^ we view Porter'smodel of generic strategies as an attempt to explain iimicompetitive behavior at a less aggregate explanatory other words, while game theory explains why some firmsare in and some others out of the industry. Porter's model(1980) tries to provide a more detailed analysis of why someof the firms already in the industry are more successful ce-Based Perspectivein the resource-based view, fímis are considered to dif-fer in terms of efficiency because of the diiferences in theircompetitive advantage due to endowed or acquired re-soun^es. Since imitation would diminish part oí the com-petitive advantage that firms have, '"the veiy concept ofosustained competitive advantage is often defined in equi-librium terms: it is that advantage which lasts after all at-tempts at imitation have ceased. So, (zero imitation)equilibrium is utilized as a yardstick to define and under-stand sustained competitive advantage" (Foss and Mahnke,1998, p. 9). More generally, referring to Demsetz (1973),Barney (1986, 1991), Rumelt (1987), Dierickx and Cool(1989) and Peteraf (1993). a firms competitive advantagewould be sustained if these criteria are met:• resources are heterogeneous enough to account for ef-ficiency differences and rent;• resources are ex ante economical (the present dis-counted value of their future prices is not higher thantheir i'urrent price);• resources are ex post non-imitable; and• resources are not perfectly mobile across firms.'*In relation to Porter's model, the first two criteria wouldappear to be met in the efforts that firms make to achievelower cost or differentiation positioning in the , when combined with a broad or lower target, is sup-posed to yield a higher than average performance. Re-quirements of the "lower cost" or "differentiation" as wellas "focus" stiategies illustrate such affinity, as, for example,is the case of sufficient spending on advertising and R&Dor efforts to secure favorable inputs (low price or high qual-ity) that lower-cost producers and differentiators wouldhave to make in order to successfully pursue their recom-mended third and fourth criteria are not so straightforwardlyrelated to Porter's analysis, but they also could be consid-ered as being indirectly present there. If the firm's re-sources—or in Porter's wording, its requirements andefforts—are Ijeing imitated or are periecliy mobile acrossfirms, there would be no differences across firms in termsof their competitive advantage on cost or , there would he no benefit in presenting their com-petitive advantage in two distinct dimensions, which, whencombined with the strategic target, would result in formingthe strategies in Figure these features ofthe resource-based perspectiveand the discussion above, we would view Porter's model asan attempt to explain firm competitive behavior at a moreaggregate explanatory level, compared to this concept of the firm's competitive advantage in thismodel would represent the aggregation of differences inAs far as the profil rales are con« enied, while rrilically discussing lhenotion of "barriers to entry." Demselz (1989) also states that: "Theequalizalion of pmflt rates through competition, however, is a proposi-tion logically valid only with res[>eel to investment on the margin of al-ternative economic activities. Only if all inputs are available inperfectly elastic supply does this imply equality between average (1988) also recogtiizps tlie (•onlribution oí game theorybut t;aUa tor more empirical research by Ktating ihat: "While game-tlie-oretio tools are well-suited in principle to lhe analysis of key aspects ofbusiness behavior, iheir application has neither produced a general the-ory of market operation nor given one much reason to expect such atheory to emerge in the foreseeable future. Under these conditions,enipiricat research t)ecomes critical to scientifÍc progress" fp. 3).its" (p. is).60 ß/jes.( Et:oiumú(n • July 2008Porter's Model oj Generic Competitive Strategies

firms' and Mahnke criticize the resource-hased ap-proach on similar grounds to their critique of game view it as lacking disequilihrium explanations. Forexample, they state that: "... sustained competitive advan-tage exists only in (zero imitation) equilibrium (cf. Lipp-man and Rumelt, 1982); it simply makes no sense to speakof sustained competitive advantage outside of equilihrium,hecause equihbrium is defined as the ahsence much of the important structure of the resource-basedpei-spective is solidly founded on equilibrium methodol-ogy" (Foss and Mahnke, 1998, p. 10). Another critical pointin Foss and Mahnke is that Porter, as well as tlie other twosubsequent alternative approaches discussed so far, ex-plains firm differences by relying on a given context (in-dustr}) or endowment of resources (factors). They do notaccount for other ionns of firms' differences, such as learn-ing and entrepreneurship (managerial change, innovation,etc.), which are explained endogenously.A related extension of the resource-based approach,called the knowledge-based view, has heen put forward byHoskisson et al. (1999)."* Based on this view, firms are con-sidered to differ in terms of their current knowledge or theirpotential in absorbing it. Referring to Kogut and Zander(1992), firms are viewed as: "...a repositoiy of capabilitiesin which individual and social expertise is transformed intoeconomically valuable products This means that by itstacitness and social complexity, a firm's stock of knowledgeis an important determinant of its competitive advantage,(Hoskisson et al. 1999, pp. 441^442)." Furtheimore, refer-ring to Cohen and Levinthal (1990), learning and innova-tion are explained by the firm's potential to acquireknowledge and use it for economically profitable ends. Thispotential is dubbed "absorptive capacity," which is "...theability of a finn to recognize the value of new, external in-formation, assimilate it, and apply it to commercial tive capacity is dependent on a firm's level of priorrelated knowledge. As such, the ease oi learning is affectedby the degree to which an innovation is related to this pre-existing knowledge" (Hoskisson, 1999, p. 442).Putting this in the context of our earlier point regardingthe endogenous nature of innovation and entrepreneurship,a firm's absorptive capacity could be the explanation forthe degree of learning and entrepreneurship if three condi-tions are met. First, innovation occurs as a result of cumu-lative knowledge and learning. Second—as long as learninghelps to build knowledge-based capacity—learning andIn their discussion, Hoskisson et a). (1999) to Porter's approachas Structure-Conduct-Perfomiance. whieh was our starling do not consider Porter's analysis to represent SCP because, despitetheir similarities, there are luridamental difíledge-based capacity are important elements that leadto innovation. Third, there is a strong correlation betweeninnovation and entrepreneurship, and such interpretationsof innovation could similarly extend to entrepreneurship is a more abstract concept than in-novation, the last condition might come in handy in empir-ical analysis by giving one the ability to make use ofmeasures of innovation in deriving conclusions about en-trepreneurship as Process EconomicsThe final approach to he discussed is the marketprocess view or market process economics, where the con-cepts of perfect competition and competitive behavior areviewed as incompatible. Foss and Mahnke (1998. pp. 13,14) cite Hayek (1948, p. 96): "The peculiar nature of theassumptions from which the theory oí competitive equilib-rium starts stands out very clearly if we ask which of theactivities that are commonly designated by the verb 'tocompete' would still be possible if those conditions wereall satisfied ... 1 believe that the answer is exactly ising, undercutting, £md improving (differentiating)the goods and services are all excluded by definition—'perfect' competition means indeed the absence of all com-petitive activities." Being in favor of such an explanationof firms' competitive behavior, Koss and Mahnke (1998, p.17) themselves state that: "Competitive advantage funda-mentally results from the subjective perception of profit op-portunities, the creation and exploitation of uncertainty, andthe coordination of learning and knowledge."However, we view such concepts as subjective percep-tions, exploitations of uncertainty, or coordination of learn-ing and knowledge as difficult to make operational inempirical analysis. Furthermore, although these elementsof conceptuahzing com])ctitive a

Given this, a good start in evaluating a finn's competi-tive advantage, or generally a firms (competitive behavior,is to make full use of those approaches that rely on moreempirically verifiable approaches, such as Porter's a sound knowledge in place on the applicability ofthese approaches, research (-ould then move on more confi-dently to a more abstract analysis. Since, at least for Porter'smodel, the body of research so far has not yet done enoughto confidently establish its validity in explaining perfoim-anee diíTerences across firms in terms of their competitiveadvantages and strategies, it is important to critically assessits applications as well as to rigorously test the model's pre-scriptions empirically. In this article, we suggest startingfrom Porter^ model to analyze fiims' le since identifying and selecting those firm.s thathave achieved competitive advantage and chosen the rele-vant strategic targets becomes a fairly straightfonA'ardprocess. One can simply place these firms within the frame-work and assess whether they fall within the recommendedalternatives or not. The more feasible a model is, the eas-ier the comparison of firms can be made; and consequently,the easier conclusions about competitive advantage andperformance are reached. This may be especially helpful inempirical settings where problems with data quality areprevalent. A feasible model gives the researcher a usefultool to quickly see whether the information from the obser-vations fits the model's dimensions or not, disi^arding thoseobservations with ambiguous fourth reason is the clarity of the model's main con-cepts. The model of generic strategies presents a clear andeasily comprehensible way of analyzing how a firm can at-tain competitive advantage and perfonn better and alsowhen it fails to do ao. The concept of competitive advan-tage can be understood without difficulty by theorists, prac-titioners and the lay audience because the meanings oflower cost and differentiation (in terms of quality at least)are relatively straightforward. In a world of many differentcultures, languages and fimis* practices, the terminologiesused, especially those in theory and business, can some-times be far from consistent. This is particularly true whena theory is translated into other languages for researchand/or teat hing piirjjoses. Furthermore, differences in ter-minology can also pose serious problems to fully absorbwhat a theory suggests for real-life business practices, es-pecially where they are applied in contexts that differ sub-stantially from those in which the theory first researchers and professionals need to engage in in-teipreting and adapting theoietical coneepts into compre-hensible and practicable terms, a model that possessesclarity in its original format is a valuable fifth reason is the model's combination oí simplic-ity ami generality (as it claims, at least). As seen has presenled his 1980 model in such general termsthat it can encompass any type of industry and firm. In ad-dition, the model has a notable simplicity in terms of ihemain elements that make up the competitive efforts to reach simplicity are sometimes associatedwith the reduction of the numlier of details or elements ofpetilive stratef^y' in the '(.lited Title' choice. "Business Source Premier"is now under llie name "Business Source Complete." which is a furtherimproved version of this believe that the a( tual number of citations in llie "BusinessSource Premier" database was even larger since we did not include anumber of citations in our count, for example, because they had notwritten specifically tbe year "1980" in their references list. However,it was (riear lo us that they were refemng to Porter's 19ÍÍ0 model.2. Why Porter's Model?There are a number of reasons for using Porter's modelto evaluate firms" competitive behavior. The first is its pop-ularity. Porter, and especially his 1980 model, has had amajor impact on the area of business strategy and on thefield of industrial economics as well. For example. Millerand Dess (1993) found that over 1986-1990, Porter's 1980work was referred in almosi half of the papers in the Strate-gic Management Journal, We also undertook a quick seai'chto find out theapproximatenumberof citations of this workin a number of journals. We did this in July 2íK)5, using the"Business Source Premier" database.'^ Wefountl that therewere a total of 8% references to Porter, of which 807 hadcited his 1980 model.'^The second reason for using Porter's model is its well-defined structure. By looking at the framework of threegeneric strategies, we see that the concept of competitiveadvantage and stiategy has been explained within a well-structured setting. The model presenta a "general rule" fora firm's strategy. It is contended that firms that follow therule or the recommended strategy will attain competitiveadvantage and perform better than firms that do not. Thebenefit of using a well-structured model for analyzing thecompetitive advantage of firms is that it provides some cri-teria or benchmarks against which finns can be easily an-alyzed and compared in ex post y linked to this, another reason is the feasibilityof tbe model's framework for empirical analyses. The ap-plication of such a model to real life situations becomes"As the world's lai^esl full-text business database. Business SourcePremier providi's full text for more than 3,650 scholarly husiness jour-naLs, including full text for nearly l,t(M) peer-reviewed business pub-lications. Coverage includes virtually all subject areas related tobusiness. This provides full lext fPDF) for more than 300 ofthe top scholarly journals dating as far back as 1922. This database isLi|>dated on a daily basis via EBSCOhost*" (Oxford Ubraries InfoniiationPlatfiirm. 2(K)5). Searching under the 'Cited References" option, weused the words 'porter, inichael' in the 'Cited Author' choice and 'rom-62 Business Ecunornics • July 2008Porter's Model ofdener'tc Cumfyetttive Stralegifs

a model, the accuracy of representation may inevitably beput into question. The trade-off between simplicity and rep-resentation is a subject of debate in every science, bul therelatively low confidence in finding universal and perma-nent laws governing the nature of social phenomena canmake this issue more debatable in economics, and evenmore so in business studies. Although it is through empir-ical analyses that models are assessed in terms of their abil-ity to capture the essence of a more complex reality, asimple and general model remains desirable in every final reason is what we would call the model's com-plementary role to two other approaches of competitive ad-vantage of firms. As argued in the previous section, in ourview Porter's model represents a rather high degree oí de-tail in the specification and explanation of firms' competi-tive behavior. While game theoretic models are concernedwith even broader consideration of strategy, they do notgenerally engage in a detailed explanation of the specificactions of firms while choosing one action in the tree of thegame. There are, of course, studies within game theory thatdo consider detailed actions of firms' competitive hehav-ior, but as an overall approach to strategy, it is more con-cerned with the context of competition rather thancompetitive actions, per 's model describes the competitive hehavior offirms more specifically than game theory, though such he-havior is still viewed as generic at the hroadest level of afirm's strategy planning and implementation process. Inorder to he successful in the pursuit of one of the recom-mended generic strategies, firms should meet a numher ofrequirements. However, the model itself is reasonahly gen-eral since it incorporates a m)TÍad of factors and conditionsfor firms into a three-generic-strategy approach with fiverecommended strategic options. On the other hand, asnoted in the discussion of the previous section, the re-source-hased perspet-tive specifies firms* competitive he-havior in more detail hy looking at how the resourcesshould he used in order for firms to be able to reach andmaintain competitive this interpretation. Porter's model has a comple-mentary feature to game theoretic models and the resourc^e-based perspective. The advantage of starting with Porter'smodel is that the knowledge gained from its applit^abilitycan provide a useful basis for further investigations alongthe lines of a broad contextual approach based on game the-ory or a more detailed intra-firm approach based on the re-source-based perspective or the knowledge-based variant.3. Concluding RemarksIn this final seíítion we provide some concluding re-marks and suggestions for future research. We have pre-sented Porter's model along with some other alternatives,the Structure-Conduct-Performance as a classical and start-ing paradigm, the New Industrial Organization and GameTheory, the Resource-Based Perspective, and the MarketProcess. These approaches to the firm's competitive be-havior were reviewed based on their relations, similaritiesand differences, with the focus on Porter's context of firms' competitive strategies in Porter'sanalysis consists of five competitive forces: threat of newentry, rivalry intensity, pressure from substitute products,bargaining power of buyers, and bargaining power of sup-pliers. According to Porter, the joint influence of theseforces determines the industry's intensity of competitionand average profitability. Porter's model of generic strate-gies encompasses the main strategic options that firms pur-sue regardless of the type of industry and the firm'sbusiness. There are two main dimensions in this model:competitive advantage, which can be in the form of lowercost or differentiation; and strategic tai'get{s), which can befound in terms of geographic areas, market segmentsserved, or range of products 's three recommended strategies are "lower cost,""differentiation," and "focus." Focus can be of tliree kinds:"cost focus," "differentiation focus," or "cost and differen-tiation focus." The non-recommended option that is viewedas the worst strategic position is what Porter calls "stuckin the middle." According to Porter, the recommendedstrategies reward firms with higher than average profitabil-ity, and the "stuck in the middle" strategy inevitably yieldspoor performance, ln relation to the other approaches re-viewed. Porter's model is considered as an insightful andconvenient approach to analyzing the firm's competitive be-havior for a number of reasons. These reasons are its pop-ularity, well-defined structure, feasibility, clarity, simplicityand generality, and complementary role to two other mainapproaches to analysis at the aggregate gh insightful and convenient, whether Porter'smodel is also a useful approach to predict superior per-formance is another issue and an important research knowledge of the usefulness of Porter's model wouldhe enhanced if a number of studies that relate to this modelare critically reviewed. In conducting such a review, itwould be best not only to point out the findings of the stud-ies reviewed, but also—more importantly—to assess theirconceptualization of Porter's model as well as the method-ologies deployed. After this literature review, it would alsobe oí interest to compare new empirical evidence with thatfound in the studies reviewed. •hirler's MOI/PI nfdeneric Competitive .StrategiesEcoriiimics • July 2(108 63

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