Porter’s literature… review

Posted on 7 Σεπτεμβρίου , 2006



Porter’s Basic Concepts

The concept of “industry”, as it has been recorded in all of Porters writings, is the field where different factors, forces and dimensions influence and shape competition. Porter strongly believes and supports that the structures of industry and the forces of competition drive the wins or losses of the firm. Defining hence the firm’s goals in the industry environment he is equally committed to the concept of “strategy” with a firm’s strategy based on the creation of competitive advantage. As his aim is to devise company strategies and as the ways in which firms create and sustain competitive advantages provide the necessary foundation for the role of the home nation, his understanding of the concept of a firm is critical. Porter does not discuss explicitly the objective of the firm rather he assumes that this is the maximization of long-term return on investments where the exact profit does not represent the firm’s goals in a micro economic manner. His main concern though, is how does the company create and sustain competitive advantage. His understanding of the goal of a firm is that of “profit orientation”.

According to Porter the organization of the firm is viewed as nine generic activities comprising the “value chain” where those activities form an interdependent system with linkages among them. The performance of one activity influences the performance of the others in a dynamic situation. A major managerial task aroused by this situation is that the connected activities have to be coordinated in content, over time and space. Competitive advantage thus is gained by carrying out the activities at lower cost, better value and superior coordination.

Porter identified the “value chain” as a means of analyzing an organization’s strategically relevant activities in order to understand the behaviour of costs. Competitive advantage comes from carrying out those activities in a more cost-effective way than ones competitors, an achievement which becomes a challenging managerial task where innovation takes the place of the key concept. Porter defines innovation in a way to include both product and process innovations and innovations in relation to all nine generic activities. According to Porter, competition is determined by five competitive forces making up the structure of the industry where the profit potential and the strategy of the firm are determined by them. Five forces looks at five key areas namely the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry.

Following the overall determination of the competitiveness of an industry, Porter has developed a tool to analyze the rivalry among the firms of the industry. By means of the concept “strategic group”, the firms within the industry are sub-divided into groups pursuing the same strategy. A competitive strategy furthermore, according to Porter, is seen as a broad formula for how a business is going to compete which is defined by “three generic strategies” for achieving above average performance in an industry. Those strategies are: cost leadership, differentiation, and focus.Following the overall determination of the competitiveness of an industry, Porter has developed a tool to analyze the rivalry among the firms of the industry. By means of the concept “strategic group”, the firms within the industry are sub-divided into groups pursuing the same strategy. A competitive strategy furthermore, according to Porter, is seen as a broad formula for how a business is going to compete which is defined by “three generic strategies” for achieving above average performance in an industry. Those strategies are: cost leadership, differentiation, and focus.
Porter’s International Strategy model

The central point in Porter’s International Strategy is the value chain: the nine generic activities and their manipulation from a company, country, or person to thrive in the international and domestic economies. Competition for Porter is the key to excellence. The major question thus is what happens to the nine activities in the course of internationalization and how these provide the necessary competitive advantage? Conceptualizing international competition Porter provides a useful two dimensional framework (Figure 3) in which he categorizes internationalization as involving:

configuration: where and at what scale are primary activities (Inbound logistics, Operations, Outbound logistics, Marketing and Sales and Services) conducted, and
coordination: to what extent and how are activities coordinated
Configuration issues concern where in the world each activity in the value chain is performed, and in how many places each activity is performed. Coordination issues concern the coordination of each activity when it is done in more than one place. For example, if the company has three plants: in the US, Finland and Taiwan, how do the activity at each plant relate to each other? Thinking in Porter’s terms of configuration and coordination, companies will try to configure and coordinate their operations in a way that is most efficient cost-wise and quality-wise. For example, they may centralize large-scale production of products to achieve economies of scale. The use of this configuration/ coordination matrix identifies both geographic positioning and the integration of value activities as determinants of competitive advantage in global industries.

According to the figure, there could be many different kinds of global strategies, depending on a firm’s choice about these dimensions throughout the value added chain. Porter identifies four broad combinations of configuration and coordination and hence four variations in international strategy:

The “export-based” strategy revolves around a geographically concentrated configuration with low coordination of activities. Under this perspective a company is attempting to gain benefits in the upstream activities (Inbound logistics, Operations, Outbound logistics) by focusing them on a single or limited number of sites and also a significant part of value creation takes place in the downstream  (Marketing & Sales and Services) section of the value chain (usually decentralised marketing).

The “country-centred” strategy has few coordinated activities and geographically dispersed configuration. In this case a reduced size replica of the parent company operates as though it was a local firm, but without the necessary autonomy. Significant diversity is possible within the miniature facsimile class, so it is further subdivided into adopters, adapters and innovators.

Combining high levels of co-ordination with geographically dispersed activities results in a strategy that Porter terms “high foreign investment” with extensive co-ordination among subsidiaries. High levels of coordination between different sites are expensive.

Geographically concentrated activities combined with high co-ordination of activities describes the “purest global” strategy. This term refers to a range rather than a single strategy, it characterises a company seeking to gain competitive advantage from its international presence both by concentrating its configuration and having a high level of co-ordination of international activities. Such a strategy is likely to involve a chain where most of the value is created in upstream activities, with downstream operations being co-ordinated for cost effectiveness.
Real cases in relation to Porter’s model

The Carrefour case

Founded in France in 1960, Carrefour is the largest retail company in France and seventh in the world. Carrefour operates in a variety of retail formats such as mini-markets, automotive centres, supermarkets, and warehouse stores. However, its main emphasis is hypermarkets which sell various goods including food, clothing, consumer goods and household appliances. These stores have a large open marketplace atmosphere and provide excellent prices. This formula has proved to be a successful format; however, Carrefour’s domestic expansion was restricted by French legislature. The limitation on hypermarket development led to Carrefour’s international expansion through profitable joint ventures.

Carrefour has strong experience and capabilities in operating on a global level as a high degree of profits are internationally generated. Also, they have the ability to operate on low profit margins. Historically, they have differentiated themselves in the hypermarket sector by focusing on cost leadership, multi-specialisation and private labels. Carrefour has 119 stores in France, 96 stores across the world and a number of regional distribution centres (physical resources). The company’s philosophy has been one of decentralisation, while the human resources department has acquired a vast amount of knowledge, experience and skills in operating within international markets, in strategic alliances and operating on low profits. Carrefour has a number of intangible resources including a good corporate image and a strong private label. The value chain analysis (Figure 4) assesses Carrefour’s competencies through the examination of its primary and support activities.

This analysis concentrates on inbound and outbound logistics, the marketing and sales of the company. In terms of procurement or inbound logistics, Carrefour concentrates on host country purchasing. This can benefit the company as purchases will be made in the same currency as sales allowing the company to meet local government regulations or standards. However, it may prove to be a disadvantage to the company if raw materials may be acquired at a cheaper price from outside the country. Regional distribution centres facilitate the gathering and distribution of merchandise to the stores. The centres facilitate inbound and outbound logistics. As it pertains to marketing and sales, Carrefour operates and is experienced using heavy promotion in international markets. This indicates experience with marketing products within different countries and cultures.

The MLN case

MLN is a privately owned Indonesian garment manufacturer that produces various styles of ladies wear, from fairly plain casual wear to high fashion dresses with a lot of accessories (embroidery and sequins). Their customers range from independent shops or boutiques in Germany, Japan or USA to Italian fashion houses such as Gucci or La Ricci. As is common practice in this type of industry, MLN starts its operations every year by generating ideas and making samples of products for the next summer season. The whole design process is conducted by the company. When samples of product are ready, wholesaler then screen the samples and organize an exhibition where potential customers (agents for boutiques, shops or fashion houses) can see the company’s latest creation. As soon as the potential customers see the samples, MLN starts to forecast the amount of materials needed for the production.

The company’s principal material is cloth or fabric, which they buy in the grey state from their suppliers in China. Following the sample and exhibition period customers will usually place firm orders, which start the production process. The production stages, which include cutting, sewing, putting on accessories and finishing, are labour intensive. In each stage of production a quality check is conducted. However, in most cases the customer will do another quality check. Finished garments (unlabelled) from MLN are shipped by the wholesaler’s logistics company and after putting on their own labels wholesaler sell them to end customers via shops and boutiques. For the MLN supply chain, the other members in the chain are wholesalers that act as their direct customers, and agents – which distribute the products to the end customers. Sometimes, agents can deal directly with MLN without the presence of wholesaler.

Assessing MLN from the perspective of Porters model of internationalization, it seems that the advantage to be gained by doing international business is low labour cost. None of the company’s products are targeted principally at the local market and the labour content in its operations is relatively high.  MLN appears to deal directly with the planning, procurement, and production stages in the supply chain, while the intensity of coordination increases greatly. The supply chain of MLN, coordination between the company and their customers take place only in the sampling process. In addition, customers may also order certain types of materials and therefore co-ordination is necessary in procuring the right materials.

When an order has been placed and material is agreed, the customer does not tend to get involved in production. The customer however will do a second quality check on the finished garments.  Considering the above two cases it seems that the coordination, no matter on the geographic dispersion, also is the distinctive feature of global strategy. If a firm is to sell in Mexico, it must be close to buyers, and have downstream activities (offices, showrooms, stock, sales and repair teams) in Mexico; while it may also have production facilities in Mexico. Downstream activities create country-specific advantages, like the firm’s reputation (Carrefour good corporate image and a strong private label), brand name (KFC), trademark (Sheffield silver) or service network (IBM). Upstream activities can be decoupled from buyers or wholesalers (MLN), and they create competitive advantages which can be utilized in many different countries.

References – Bibliography

ER, M., MACCARTHY, B., Configuration and coordination in international supply chains: Preliminary Findings from International Manufacturing Companies in Indonesia University of Nottingham NG7 2RD UK

MORRISON, A., ROTH, K., 1993, “Relating Porter’s configuration/coordination framework to competitive strategy and structural mechanisms: analysis and implications”, Journal of Management, Winter1993; 19: 797-818

PORTER, M.E., 1986, “Changing patterns of international competition”, California Management Review, Vol. 28 No. 2, 1986, pp. 9-40.

PORTER, M.E., 1986, Competition in Global Industries (1986). Boston, Mass.: Harvard BusinessSchool Press.

PORTER, M.E., 1990, The Competitive Advantaqe of Nations (1990). London : The MacMillan Press.

ROTH, K.,. (1992), International Configuration and Co-ordination Archetypes for Medium-Sized Firms in Global Industries, Journal of International Business Studies, Third Quarter, 1992, pp. 533-549

SYLVERBERG, T, 2004 The internationalization process of the firm – a case study, Linköping, 2004, http://www.ep.liu.se/exjobb/eki/2004/iep/026/, accessed 10th June 2005

Sørensen, O, 1994 The Porter Approach, Aalborg Univeristy Centre for International Studies January 1994, http://www.business.aau.dk/ivo/publications/study/sms6.pdf , 10th June 2005

Bekkhus, R., 1993, Carrefour: Opportunities in Mexico, http://www.business.no/artikkel_final_strategic.htm, 10th June 2005

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