Porter’s strategy theory, developed by renowned economist and professor Michael E. Porter, is a framework for understanding competitive advantage and strategic positioning within industries. Porter introduced his theory of competitive strategy in his seminal book “Competitive Strategy – Techniques for Analyzing Industries and Competitors,” published in 1980. The theory emphasizes the importance of understanding the underlying structural drivers of competition within an industry and choosing a competitive strategy that enables a company to achieve sustainable competitive advantage.
Key components of Porter’s strategy theory include…
1. Five Forces Analysis – Porter’s Five Forces framework is a tool for analyzing the competitive forces at work within an industry. The five forces include the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the threat of substitute products or services, and the intensity of competitive rivalry. By assessing these forces, companies can identify the sources of competition and determine the attractiveness of an industry.
2. Generic Competitive Strategies – Porter identified three generic competitive strategies that companies can pursue to achieve competitive advantage within their industry such as…
- Cost Leadership – Companies that pursue a cost leadership strategy aim to become the lowest-cost producer in their industry. This allows them to offer products or services at lower prices than competitors and attract price-sensitive customers.
- Differentiation – Companies that pursue a differentiation strategy seek to create unique products or services that are valued by customers and are perceived as superior to competitors’ offerings. Differentiation can be achieved through product features, brand image, customer service, or other factors.
- Focus – Companies that pursue a focus strategy concentrate on serving a specific market segment or niche. By focusing their efforts on a narrow target market, they can tailor their products or services to meet the specific needs and preferences of customers within that segment.
3. Value Chain Analysis: Porter introduced the concept of the value chain, which describes the sequence of activities that a company performs to deliver value to customers. Value chain analysis involves identifying the primary and support activities within a company’s value chain and assessing how these activities contribute to competitive advantage.
Overall, Porter’s strategy theory enables companies to develop effective strategies for achieving competitive advantage within their industry. By applying concepts such as Five Forces analysis, generic competitive strategies, and value chain analysis, companies can develop effective strategies for positioning themselves within their industry and achieving long-term success.