Critically Evaluate the Approaches of Michael Porter and Gary Hamel to the Paradox of Markets and Resources
The theories of both Michael Porter and Gary Hamel have changed that way organisations strive for competitive advantage. Their ideas on competitive strategy and management innovation are now seen as essential transformational tools for businesses looking to deliver profitable growth for its stakeholders. Michael E. Porter is a leading authority on competitive strategy, the competitiveness and economic development of nations, states, and regions, and the application of competitive principles to social problems such as health care, the environment, and corporate responsibility.
He is the Bishop William Lawrence University Professor, based at Harvard Business School. (Harvard Business School, 2011) Michael Eugene Porter was one of the most influential strategists of his decade introducing a number of effective strategic concepts including; 5 forces analysis, generic strategies, the value chain, strategic groups, and clusters. He was a design ‘design school’ strategy theorists, who considered strategy to be a part of a well formed, logical planning process.
Michael Porter focused on the economic foundations of competition, principles of strategy, creating and growing a strategy, organising for strategy and strategy and social responsibility. One of the most important and widely used concepts was his 5 forces framework analysis. This identifies the forces that shape a firm’s strategic environment. Porter’s 5 forces framework helps companies identify the attractiveness of an industry in terms of 5 competitive forces, the threat of entry, the threat of substitutes, the power of buyers, the power of suppliers and the extent of rivalry between the competitors. Exploring Corporate Strategy, 2012).
His concept is similar to that of a SWOT analysis and it shows how a firm can use these forces to obtain a sustainable competitive advantage. All of these factors are measured as high, medium of low. The threat of entry measures how easy it is for a business to enter the industry. The higher the threat of entry the worse it is for the existing companies within that industry. An attractive industry is that where the barriers of entry are high which decreases the threat of new competitors.
Some of these barriers to entry include economies of scale, brand identity, capital requirements and government policy. (Strategy Safari, 2008) Suppliers are essential for the success of an organisation. The power of supplier’s looks at the suppliers bargaining power within that industry, not only does it include raw materials but labor and sources of capital too. The supplier gains power if there is no other substitute for their product or there are high switching costs for an organisation. The power of the buyers looks at the companies immediate customers not the overall consumers.
The more powerful the buyers are the more they can demand cheaper products, prices and service enhancements, all of which are likely to reduce profits for firms within that industry. The threat of substitutes are alternative products that customers can purchase over a company’s product that offer the same benefit for the same or less price. The extent of the threat depends on the extent to which the price and performance of the substitute can match the industry’s product and the willingness of customers to switch. The final force that Porters model looks at is the intensity of rivalry among competitors.
If the intensity is fierce between competitors it will encourage businesses to engage in, Price wars (competitive price reductions), Investment in innovation & new products and Intensive promotion. Porter’s generic strategies stated that there are 2 basics types of completive advantage that a firm can possess a low cost or differentiation. These categories are combined with the scope of the market the business is within and looks at the size and composition of the market they intend to target, stating whether it is narrow or broad. There are 4 generic strategies that a company must measure in order to perform well within their industry.
The four strategies are described as; cost leadership, differentiation and focus. The Cost leadership strategy aims for the business to have a low price product being the lowest-cost producer. The differentiation strategy involves the development of high quality unique product or services which is usually priced high. Focus is the third generic strategy based on competitive scope. A focus strategy targets narrow segment of domain of activity and tailors its products or services to the news of that specific segment to the exclusion of others. (Exploring Corporate Strategy, 2012).
An example of a company that currently follows the cost leadership strategy is Ryanair. Ryanair Ltd is an Irish low-cost airline based in Dublin Airport with operational bases at Dublin and London Stansted Airports. The airline has been characterised by rapid expansion, a result of the deregulation of the aviation industry in Europe in 1997 and the success of its low-cost business model. Although initially this strategy was used to gain competitive advantage over competitors, their success has seen the emergence of approximately 60 new low-cost airlines.
As Porters generic strategy model states that a company has to choose one of these strategies and try not to combine both strategies it meant that other companies could try to emulate their success by employing the same strategy and an example of companies that have done this is EasyJet and Aer Lingus. However later on in Porters career he understood that are some circumstances where 2 strategies can be combined. This was proved with the creation of the Strategy Clock. The strategy was somewhat created to go against Porters generic strategies and looks at providing another way of approaching those such strategies.
Bowman’s Strategy Clock considers competitive advantage in relation to cost advantage or differentiation advantage and is father more market-focused than Porters strategy. With the Strategy Clock looking at the different combinations of price and perceived value, businesses can begin to choose a position of competitive advantage that makes sense for the organisation’s competencies. It also allows business to look at how to establish and sustain a competitive position in a market driven economy. Dr. Gary P.
Hamel is an American management expert, who alongside C. K. Prahalad a corporate Strategist created the concept of core competences. Gary Hamel born in 1954 is one of the most respected contributors to the debate on strategy of the late 20th century. He attended both Andrews University and the University of Michigan. He is also the founder of Strategos, an international management consulting firm based in Chicago. Hamel’s concept derives from a strategy known as the resourced-based (RBV) view also known as the capabilities view.
The RBV combines the internal analysis of phenomena within companies (a preoccupation of the ‘distinctive”” and ‘core competency’ group) with the external analysis of the industry and the competitive environment (a focus of the industrial organization group. (Create Advantage, 2012) Hamel’s and Prahalad’s core competences strategy was first highlight in their 1990 article called ‘The Core Competence of the Organisation. In this article they stated that the way for a company to gain competitive advantage was their core competences which will allow them to introduce newer products and services within their market.
They both believe that core competences lead to the development of core products. Gary Hamel explored how companies can become management innovators, as few companies had been able to come up with a formal process for fostering management innovation during the 1990’s. Hamel and Prahalad believed that competitive advantage derived from deeply rooted abilities which lie behind the products that a firm produces (Strategy Safari, 2012), this is a theory that goes against Porter’s theories which always looked at the external factors to gain competitive advantage and fitting in with the market.
Prahalad and Hamel went on to outline three tests to be applied to determine whether something is a core competence: •First, a core competence provides potential access to a wide variety of markets. •Second, a core competence makes a significant contribution to the perceived customer benefits of the end product. •Third, a core competence is difficult for competitors to imitate because it is a complex harmonisation of individual technologies and production skills. (The Economist, 2008) The Core competences model was based on companies in Japan.
This could be used as a critique as it does not take into account whole world as businesses worldwide have different working ethics and practices. Hamel’s and Prahalad’s view only takes into account the resource-based view essentially ignoring the market the industry is in disregarding Porters view. Although both Porters’ Five Forces framework and Hamel and Prahalad’s theories are widely renowned in during their creation, they have both come under some criticism in recent times. The model of Porter’s 5 forces is suitable for analysing an industry in general.
His model can give strategists and managers alike an overview about the main factors of the external environment. However with similar economic strategy tools, there are limitations and has been subject of much critique. One of its main areas of criticism lies within the era that his model was created. His model was created in the 1980s. During this time many companies were focused on sustaining profit and surviving as the world’s economy was suffering from a recession started in the early 70’s. Porter’s framework also relied heavily on assumptions of the market and other businesses.
This model helps to simplify the view to this industry but every business situation is too complex to analyse it with such a simple tool as there many other factors that a business has to take into consideration. Another model assumption that the model makes is that there are no changes in the industrial environment, however in today 21st century market. This is shown for example on the enormous growth of the e-commerce sector. His model also doesn’t accommodate for larger or smaller companies within their industry due to the lack of precision and accuracy when assessing the external factors.
Although the 5 Forces framework is somewhat simple and irrelevant in today’s industry, if you combine this tool with other common external environment tools like PESTLE, Porter’s diamond and the industry life cycle, companies who use it are able to obtain very detailed overview about the opportunities and the threats of an industry. So with the aid of other strategic tools it can be helpful for making decisions concerning the entry in the business or for further expansion. In order to be successful in today’s business environment, organisations must be strategically aware.
The need for all managers is to be able to think strategically. Decisions by managers have a strategic impact and contribute to strategic change. Strategic management is a highly important element of organisational success. Strategic success requires a clear understanding of the needs of the market, and the satisfaction of targeted customers more effectively and more profitably than by competitors. Unlike the models that have been discussed in the essay, managers now have to take consideration of not only just the market as Porter suggests but the companies resources and competences of gain complete competitive advantage.
With the emergence of newer, faster technological innovations it is vital that businesses within the gadget market are able to compete successfully with their competitors or face losing a foot hold within their industry. An example of this would be in the mobile phone market. This market can be described as a hyper-competitive market due to rapid changes within the market and the high intensity of competition. The main 2 firms that are ‘winning’ within this industry at the moment are Apple with their iPhones and Samsung with their S3 models of smartphones due to their innovative designs and technology.
However these 2 firms are currently at ‘logger-heads’ due to both companies placing substantial law suits against each other due to alleged copyright and patent infringes on their smartphones and tablets. Due to the increased pressure of rivals these firms could look at Porters’ 5 forces as it focuses on the vital external factors that could affect them. I already believe Apple to be following core competences model as they originally started out producing computers, which then moved to iPods, laptops, smartphones and now tablets. This diversification has led them to be market leaders in an every changing market industry.