Competitive Advantage of Firms (Porter: Chapter 2)

Chapter two “The Competitive Advantage of Firms in Global Industries” from the book “The Competitive Advantage of Nations” from Michael Porter questions how firms create and sustain competitive advantage (CA).

Firms need global strategies to sustain CA. “Industry Structure” and “Positioning Within an Industry” are the two competitive strategies determining a firm’s CA.

Five elements affect industry structure: i) new entrants ii) substitute products & services iii) bargaining power of suppliers iv) bargaining power of buyers and v) rivalry among existing competitors. These elements also shape profitability because determine i) prices to charge ii) costs to bear and iii) investments required.

“Lower Cost” and “Differentiation” are the two central factors determining the position of a firm within an industry. Firms reduce costs when they design, produce, and market their products and services more efficiently than competitors. Differentiation is a result of product quality and special features of after-sale service.

Scope also influences a firm’s position within an industry. The range of products, the number of distributions channels, the definition of target audience, the limitation of geographic sale area, and the number of competitors are variables that end up affecting the CA of a firm. However, scope also allows firms to identify where operations overlap with competitors’ so that a cooperative approach can be negotiated.

Innovation is another important factor for sustaining CA. Constant improvements in technology and better methodologies and ways of doing things help a firm influence industry structure as well as position better within this industry.

The causes of innovation are i) emergence of technology ii) shifting buyer needs iii) emergence of an industry segment iv) shifting input costs or availability and v) changes in government regulations. In this context, firms that move earlier are in a better position to sustain CA for a longer period. This is the reason why firms should be constantly investing in market research as well as research & development since these are indicators that help firms anticipate changes and thus perceive and pursue innovation.

In summary, a firm creates and sustains CA by i) controlling sources of “positioning” ii) making cumulative investments and iii) enforcing constant improvements & upgrading in value chain.

In a global strategy context, firms must be aware of “Configuration” and “Coordination”. Configuration has to do with how many locations products & service are designed, produced and commercialized, and Coordination is about the challenge and costs of managing dispersed activities and identifying joint opportunities throughout the globe. Government is a powerful force dispersing activities. It does so through levying tariffs, nontariff barriers, and making nationalistic purchases.