Confounding Porter.

How to avoid being caught in the middle…

 

In any given field it’s often possible to tell who the real giants are by looking at the number of people lining up to knock them down.  By this measure, Harvard Business School’s incumbent strategy guru, Michael Porter, towers over the field of corporate competition.  

Professor Michael Porter, Harvard Business School

During my time at business school a few years ago, sideswipes at Porter were de rigeur, although evidence that those doing the swiping had actually read any Porter was much harder to come by.  Hence, one lecturer who insisted that Porter regarded companies as homogeneous (he – the lecturer that is – didn’t last long, to be fair), a writer who found Porter’s distinction between strategy and operational effectiveness “bizarre”, and a whole raft of people who completely misunderstood the idea of ‘cost leadership’.  

Arguably, Porter himself was at least partly to blame for the latter confusion.  He came up with a simple (but not strictly necessary) idea that he dubbed ‘generic strategies’.  You can either focus on something or be a generalist, and in either of those categories you can be cost leader or differentiate.  These choices involve making compromises which lead to defensible positions.  If you try to do both, then you are ‘caught in the middle’, which is a polite way of saying you’re screwed.

Later researchers concluded that most companies were ‘caught in the middle’, on this definition, and thereby started handing out brickbats.

Porter’s magnum opus of corporate strategy is Competitive Advantage (1985).  Here he devotes masses of detail to the task of achieving effective differentiation at all levels of the ‘value chain’, and a similar bulk of detail to lowering costs by careful manipulation of cost drivers, again at all levels of the value chain.  On word count alone it’s reasonable to assume he held cost control to be as important as differentiation.  And most successful companies do indeed try to minimise their costs while differentiating effectively (i.e.  in a way that customers value and which is hard to copy without compromise).  So they’re stuck in the middle, aren’t they?

No, they’re not.

In Porter’s generic strategy model, there is only room for one cost leader in the general realm and one in each area of focus.  This is ‘absolute cost leadership’.  All forms of costly differentiation are eschewed in order to occupy the lowest possible cost position in any given industry (general) or segment (focus).  This is not necessarily to say that the product has the lowest possible quality.  A higher material quality for example can result in an overall cost saving if it drives down warranty costs.  A fast aircraft turnaround can be great for customer service, but is also key to minimising costs, by maximising utilisation.  A cost leadership strategy requires an absolute but three dimensional focus on minimising cost over and above all other considerations.  In the above example, the reason for selecting the better quality material is the net cost reduction, not the differentiation benefit.

In practice it’s arguable that this isn’t a very helpful categorisation, although it does highlight the fairly subtle point that in practice it’s very difficult to run a ‘cost first’  focus in the same organisation and culture as a high-end differentiator.  The mind-set is very different, as illustrated above.  But all the firms in a given industry, even the ‘cost leaders’, are really selecting a given product and service positioning that they believe to be attractive to a target customer base, and delivering that proposition for the lowest cost they can.  Even the idea of differentiation can become a little blurred.  Ryanair for example is the clear absolute general cost leader in European civil aviation.  Nevertheless it has an on-time performance which is amongst the best in the industry, a consequence of its approach to aircraft utilisation.  Arguably, that’s a differentiator, but of course it doesn’t come at the expense of compromising the cost leadership position.  Conversely, there are limits to how far it can push cost leadership if it ends up with a product which is unattractive at any price.  

But in any case, cost leadership is not the same thing as cost advantage, which is what Porter is really addressing in detail in his work.

Being ‘stuck in the middle’ occurs when a firm tries to develop a cost advantage that is incompatible with its differentiation position (and thus compromises it), or when it tries to develop a degree of differentiation which is incompatible with its cost positioning (and thus compromises it).  (This is not the same as selecting a differentiation/cost position which is not valued by customers in comparison to rival offerings, although both are equally problematic of course.)

Generic strategies as such are not fundamental to Porter’s thesis, and the issue becomes much clearer when we analyse the value system in detail, with whatever tool we prefer to use.  Porter variously suggested his ‘value chain’ and ‘activity map’ models to help do this.  It’s possible to criticise the value chain formulation in particular, for being too manufacturing-biased, but his fundamental idea wasn’t wedded to a specific model.  His point was that  “a systematic way of understanding all the activities a firm performs and how they interact” is necessary for analysing the sources of competitive advantage.  What we see for a firm ‘caught in the middle’ is fundamental inconsistencies between key strategic conditions (potentially including the ‘softer’, cultural ones.)  In contrast, a firm with a strong position can be seen in a network of activities, conditions and resources which are not only consistent but which mutually reinforce each other.

Alfred North Whitehead famously wrote that “the safest general characterization of the European philosophical tradition is that it consists of a series of footnotes to Plato.”  The safest general characterisation of the evolution of corporate strategy over the last thirty years is that it consists of a series of footnotes to Porter.