Porter's Model of Generic Competitive Strategies: AN INSIGHTFUL AND CONVENIENT

APPROACH TO FIRMS' ANALYSIS

Author(s): Orges Ormanidhi and Omer Stringa
Source: Business Economics, Vol. 43, No. 3 (July 2008), pp. 55-64
Published by: Palgrave Macmillan Journals
Stable URL: https://www.jstor.org/stable/23491593
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 Porter's Model of
Generic Competitive
Strategies
AN INSIGHTFUL AND CONVENIENT APPROACH TO FIRMS' ANALYSIS

By Orges Ormanidhi and Omer Stringa

Orges Ormanidhi is a research asso

A firm's competitive behavior is an important topic for

0
ciate in a joint appointment at the practitioners, theorists, and policy makers. Among the
planations of firms' behavior is Michael Porter's model.
University of Toronto and the Univer
sity of Guelph. Earlier, he worked asWe have presented this model along with some alternative
an economic analyst with the On approaches: Structure-Conduct-Performance, the New
tario Ministry of Finance. He also dustrial Organization and Game Theory, the Resource

r\
worked at Oxford Outcomes, Ltd. Based Perspective, and Market Process Economics. Thes
and Oxford Internet Institute in theapproaches are discussed in terms of their relations, sim
United Kingdom, Statistics Norway,larities, and differences relative to Porter's model. In our
comparative discussion, we support the use of Porter's
and the university of Tirana in Albania. His research inter
model to evaluate firms' competitive behavior. Our reasons
ests include firms' competitive behavior, heath economic
for this support are this model's popularity, well-defined
modeling and evaluation, productivity, and punie policy.
structure, feasibility, clarity, simplicity, generality, and
Orner Stringa is dean of the Faculty
complementarity to two other main approaches. We find
of Economy, University of Tirana, the
a Porter model to be a convenient approach to the firm
post that he also held over 1996 — competitive advantage and strategy.
1998, where he first became a fac
ulty member of the Department of
Applied Mathematics in 1973 and
Professor in 2002. His varied re choose are important questions for the econ
search interests include transition is omy. Sound answers to such questions help
sues in Albania, including economic
reform and fiscal and monetary policies. Earlier research How firms compete and what strategies they
explain individual firms' successful and un
successful competitive moves and positions
and further the understanding of the causes of better and
has included portfolio optimization, queuing models, and
worse performance. Improved understanding of firms' com
energy effectiveness. Educated at the University of Tirana,
he has a B.S. in mathematics, a B.A. in finance, andpetitiveness
a would also serve as input to improve policies
Ph.D. in applied statistics in economics. concerning competition and related issues; and improved
policies will, in turn, provide valuable support to efforts to
continuously develop markets and businesses. Finally, at

This article draws on the thesis that Orges Ormanidhi wrote for his Masters of Philosophy from Staffordshire University.

Porter's Model of Generic Competitive Strategies Business Economics * July 2008 55

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a more aggregate level, this understanding can also serve
for informed comparisons in domestic as well as interna
tional contexts by better assessing firms' competitive be
havior across different industries or countries.
Given the importance of competition, an important
strand of the literature has focused on the identification of
the most successful competitive strategies that firms pur
sue. A well-known framework within this literature, espe
cially among business strategists and industrial economists,
is Porter's model (1980, 1998, and 2004). This approach,
presented in section 1, is the focus of our discussion in this
article. Porter proposes that if firms pursue any of his three
recommended generic competitive strategies they will be
able to outperform competitors who do not pursue such
strategies.
The recommended strategies are "lower cost" or "cost
leadership," "differentiation," and "focus;" and "focus" can
be found in three variants—"cost focus," "differentiation
focus," or "cost and differentiation focus." In section 1, four
other approaches—Structure-Conduct-Performance, New
Industrial Organization and Game Theory, Resource-Based
Perspective, and Market Process Economics—are also
briefly presented. We have chosen to concentrate on
Porter's model because we view it as an insightful and con
venient approach to the analysis of firm's competitive be
havior. Our reasons for this are the model's popularity, well
defined structure, feasibility, clarity, simplicity and pre
sumed generality, and its complementarity to two other
main approaches in terms of the aggregate level of analysis.
1. Porter's Model and Other Approaches
Structure-Conduct-Performance
Before presenting Porter's model, we start with a brief
description of the Structure-Conduct-Performance (SCP)
paradigm since it can be considered as a classical approach
and has also served as a benchmark or starting point for
many economists who developed other approaches pre
sented here.1 SCP was the main approach from the 1950s
to the 1970s. As the name suggests, it consists of three
main elements:
• structure of industries, mainly defined by the degree of
concentration, market share distribution, etc.;
• conduct of firms, which involves firms' actions in terms
of their price setting, advertisement spending, technol
ogy, etc.;
• performance of firms/industries, mainly defined by
measures of profitability but which were especially re
lated to the extent of market power.
The three main causal relationships among these ele
lrThanks to one of the anonymous referees for pointing this out.
56 Business Economics • July 2008 Porter's Model of Generic Competitive Strategies
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ments in the SCP approach include:
• the impact of structure on conduct;
• the impact of structure on performance; and
• the impact of conduct on performance.
However, among these, the most important relationship
is that between the structure of industries and firms' per
formance. As far as performance is concerned, market
power is assumed to be positively related to profitability,
i.e. the higher (lower) the market power the higher (lower)
the profitability. For example, utilizing data from the U.S.
manufacturing industry over 1936—1940, Bain (1951)
found support for the hypothesis that profitability of firms
in highly concentrated industries is larger than in less con
centrated ones. In a more recent study, Mueller and Rau
nig (1999) tested whether the results obtained from the
standard SCP model differ depending on the degree of het
erogeneity of the firms in industries. An important refine
ment to the classical SCP model that can be derived by the
findings of this study is that the causal relationship between
concentration and performance postulated by SCP propo
sitions would hold in homogeneous rather than heteroge
neous industries.
While structure was considered as exogenous in the
SCP paradigm, the most important factors related to struc
ture were barriers to entry. In the 1993 reprint of the first
edition of Bain (1956, pp. 53-166), three main factors are
considered as entry barriers: economies of scale, product
differentiation advantages, and absolute cost advantages.
Mueller and Raunig (1999, p. 317), also note that: "... our
results do not imply that market structure is irrelevant when
evaluating performance and policies for heterogeneous in
dustries. What we have shown is that industry concentra
tion is not systematically associated with profitability in
these industries. ... Indeed, the one variable that is signif
icantly correlated with profitability in the heterogeneous
industries is advertising intensity, which is often interpreted
as a component of entry barriers."
However, the assumed exogenous nature of structure
has often been an object of the critique of SCP since it is
believed that, in practice, firms' actions (conduct) and prof
itability (performance) are considered to influence market
structure. More recent extensions to account for endogène
ity include efforts to divide entry barriers into exogenous
and endogenous. For example, Shepherd (1990, p. 274)
lists 14 factors as the common cause of entry barriers. Ex
ogenous (economic or intrinsic) causes of barriers include
capital requirements, economies of scale, product differ
entiation, absolute cost advantages, diversification, re
search and development intensity, high durability of
firm-specific capital, and vertical integration. Endogenous
(voluntary and strategic) causes of barriers include retali
ation and pre-emptive actions, excess capacity, selling ex
penses (including advertising), patents, control over other
strategic resources, and "packing the product space."
Delorme et al. (2002) provide an empirical example
that accounts for endogeneity, utilizing data from the U.S.
manufacturing industry for 1982,1987, and 1992. Apply
ing a simultaneous equations framework to study the rela
tionships between structure, conduct, and performance,
their main findings are:
• structure does not depend on performance, which sup
ports the assumed exogenous nature of structure found
in classical SCP;
• structure affects performance but not conduct; and
• performance does not depend on conduct.
Although exogeneity of structure would be supported
in this study, these findings confirm only one out of three
fundamental causal relationships in the SCP approach, the
impact of structure on performance. In particular, they show
a limited ability of the firm to influence its performance. A
criticism of SCP is that it lacks a more explicit analysis of
the firm's actions and its ability to influence its perform
ance. It was this missing aspect in SCP that is the main ob
ject of Michael Porter's work on the firm's competitive
advantage and strategy.
Porter's Model
Porter's model of generic competitive strategies is an
important synthesis of Porter's research and teaching ex
perience within strategy and industrial economics. Since
the publication of this model in 1980, Porter (1998 and
2004) has confirmed his belief that firms should pursue one
of his recommended strategies in order to succeed. From
the firm's point of view, the most relevant and important as
pect of the competitive environment is the industry in
which the firm competes. In Porter's wording, the industry
is the "arena" where competition takes place.
In light of Porters analysis, industries are comprised
of firms that produce close substitutes; but the firms' com
petitive environment has a common structure, consisting of
five competitive forces. These forces, which are viewed as
the determinants of the industry's overall competitiveness
and profitability, are:
• threat of new entry,
• intensity of rivalry among existing firms,
• pressure from substitute products,
• bargaining power of buyers, and
• bargaining power of suppliers.
According to Porter, it is the joint influence of these
forces that determines the intensity of competition of each
industry, where the strength of each competitive force is in
dustry-specific. Profitability, considered as the "rate of re
Porter's Model of Generic Competitive Strategies Business Economics • July 2008 57
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turn on invested capital," is negatively related to these
forces' overall strength. Hence, the greater the strength of
the five forces that affect firms, the lower the expected prof
itability in the industry.
In Porter's work, analyzing an industry in terms of the
five competitive forces would help the firm identify its
strengths and weaknesses relative to the actual state of
competition. Porter's main argument to support this is that
if the firm knows the effect of each competitive force, it can
take defensive or offensive actions in order to place itself in
a suitable position against the pressure exerted by these
five forces. Although the first consideration for a firm is to
place itself against the competitive forces in a "defendable"
position, Porter thinks that firms can affect the competitive
forces by their own actions. This view of competition holds
that not only the existing firms in the industry are actual or
potential competitors. Additional competitors may arise
from what Porter calls "extended rivalry"—customers, sup
pliers, substitutes, and potential new entrants.
Given this context, Porter goes on to suggest strategies
that firms should pursue in order to position themselves
against the pressure of the main competitive forces and
achieve higher profitability than the industry's average.
These strategies are presented in the so-called model of
generic competitive strategies (Porter, 1980). The term
"generic" would refer to the broadest level of the strategic
approach that the firm chooses to pursue, regardless of its
business, be it manufacturing, service, etc. This model is
presented in the well-known Figure 1.
The two dimensions in this framework are strategic ad
vantage and strategic target. Strategic or competitive ad
vantage is of two kinds, differentiation or lower cost.
Strategic target or competitive scope is not specified in Fig
ure 1; but, as Porter points out, it can be in terms of geo
graphic targets, customer segments served, and the range of
products. The combination of these two dimensions, com
petitive advantage and strategic target, creates the three
main strategic alternatives: "differentiation"2, "cost lead
ership" (or "lower cost"), and "focus", where focus can be
of three kinds, "cost focus," "differentiation focus," or "cost
and differentiation focus."3
Porter's recommendation to firms is to follow one of the
five recommended strategies presented in Figure 1 because
these are the options that would give firms the ability to se
cure a favorable position in industry, given the intensity of
the five competitive forces. Hence, according to Porter,
2
In order to assist the distinction between a strategy ("differentiation")
and a competitive advantage (differentiation), the use of quotation
marks (".") indicates strategy.
In Porter (1985), however, he seems to recommend "focus" in only two
distinct variants, "cost focus" or "differentiation focus".
 FIGURE 1
strategies. Hence, the position denoted by S
in Figure 1 is not the only non-recommended
PORTER'S MODEL OF GENERIC COMPETITIVE STRATEGIES option. Positions along the inner lines, al
STRATEGIC ADVANTAGE
though not directly discussed by Porter,
(COMPETITIVE ADVANTAGE) which we have denoted by AS, BS and CS,
should also be considered as non-recom
Uniqueness perceived
mended options.
by customers Low cost position
(Differentiation) A (Lower cost) Compared to the SCP model presented
above, Porter's work has some similarities
but, more importantly, differs with SCP in
0 £7
"O Q)
1 SP COST LEADERSHIP terms of the main object of the analysis.
DIFFERENTIATION
1_ W
è3 OR
Similar to SCP, Porter recognizes the impor
ko si LOWER COST
tance of industry structure on both firm's be
£? m2
>-Iw
ÜJ
havior and performance; but differently from
o >
cs t
SCP, Porter views industry structure and
r t
< Q.
firms' actions as mutually dependent. As far
Ï 5 c S? as industry structure is concerned, despite
0> CO

no S FOCUS similarities, Porter has also extended its

o o
i/) t
<0
a) Cost Focus; b) Differentiation Focus; scope with the "extended rivalry" concept.
c) Cost and Differentiation Focus
However, more importantly, the main object
in Porter's analysis is the firm or the firm's
Sources: Porter (1980. p. 39); Porter (1985. p. 12)* competitive behavior, whereas the main ob
ject of SCP is the context in which competi
tion occurs. While in the SCP the role of the
firms should pursue the model's recommended strategiesfirm is understated, in Porter's work it is spelled out and
in order to achieve higher profitability than their competi analyzed as the most important source of superior per
formance.
tors. The strategic alternative that Porter specifically does
not recommend is dubbed by him "stuck in the middle,"
which is the position we have illustrated by the circle S in Alternative Approaches
the figure. Porter's prescription is that the choices among In this section we discuss some alternative approaches to
the generic strategies are mutually exclusive if a firm is to strategy and competitive advantage of firms, drawing on th
achieve above-average performance. study by Foss and Mahnke (1998). They categorize these ap
While explaining his three main strategic alternatives,
proaches into two main areas, the equilibrium-based and the
Porter asserts that: "Effectively implementing any of these market process. The equilibrium-based category include
generic strategies usually requires total commitment andthree groups, which are: the industry analysis approach a
sociated with Michael Porter (1980), approaches based on
supporting organizational arrangements that are diluted if
there is more than one primary target" (Porter, 1980, p. 35).the new industrial organization and game-theoretic reasoning
In the new introduction to the 1998 edition of his 1980
in general (Tiróle, 1988; Shapiro, 1989), and the resourc
based perspective (Demsetz, 1973; Wernerfelt, 1984; Bar
book, he reinforced this by stating that: "Another misun
derstanding revolves around the need to choose between ney, 1986, 1991).5
low cost and differentiation. My position is that being theThe market process category, according to Foss and
lowest cost producer and being truly differentiated Mahnke
and (1998, p. 13), is considered to be a non-equilibrium
commanding a price premium are rarely compatible. Suc based approach, under "... the banner of 'market proces
cessful strategies require choice or they can be easily economics'
imi (Boettke and Prychitko, 1998). This line o
tated. Becoming 'stuck in the middle'—the phrase I
thought includes the Austrian school of economics (e.g.
Mises, 1949; Hayek, 1948; Kirzner, 1973; Lachmann, 1986
introduced—is a recipe for disaster" (Porter, 1998, p. xiv).
The same ideas are maintained in his 2004 edition as well. and evolutionary (Nelson and Winter, 1982), Schumpeterian
(Schumpeter, 1934), and post-Marshallian economic
The main implication of Porter's arguments is that, ex
cept in rare and nevertheless temporary cases, a firm can
not successfully pursue a combination of recommended ''In the 1998 and 2004 editions of the model of generic strategies,
Porter, however, notes that nothing like equilibrium conditions was
4The terminology in parentheses is mainly from Porter (1985.) meant in his analysis.

58 Business Economics • July 2008 Porter's Model of Generic Competitive Strategies

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(Loasby, 1991), as well as some contributions utilizing a more ifies ex ante evaluations, where "E" stays out of the indus
formal, neoclassical character (e.g., Fisher, 1983)." try with the belief that "I" will retaliate by engaging in a
price war. In the case of the belief that "I" will choose "Re
New Industrial Organization and Game Theory taliation" the rational choice for "E" is to choose "Not

As the heading suggests, the new industrial organiza Enter" as opposed to "Enter." However, if "E" would in
tion approach is closely linked to the concepts of game the deed enter the industry, the choice of "Retaliation" by "I
ory in analyzing firm's strategic behavior. The term would be based on an irrational behavior because in such

"strategic" in the terminology of game theory implies in case "I" would be better off by choosing "No Retaliation."
terdependence—firms' behavior affecting each other's per For "I", while "Retaliation" would be rational in ex ante
formance, e.g., profits. From a game-theoretic perspective, evaluations (or in one-shot game settings), it is not so once
competitors solve a specified game that has an equilibrium "Enter" by "E" is in place since it is "No Retaliation" that
condition in the form of Nash equilibrium or its refinements is the rational choice in such ex post situations (or in dy
(sub-game perfection). In the context of firm strategy, the namic game settings). This also means that only Eq2 is a
need for this refinement is that while the Nash equilibrium sub-game perfect Nash equilibrium.6
specifies equilibrium conditions based on ex ante evalua In relation to Porter's analysis, the first type of equilib
tions, some of these conditions do not imply rationality (or rium (Eql) could be the case when existing firms are cred
sub-game Nash equilibrium) in ex post situations. ible in their threats to retaliate against the potential
As an example of this, which relates to Porter's analy entrants, which relates to his discussion of one of the five
sis of industry, we present the following simple game in Fig competitive forces noted earlier, i.e. the "threat of new
ure 2, where a potential entrant, "E", and an incumbent, entry." More generally, Eql type of equilibrium would hold
"I", decide on their strategic moves. In this game "E" de if the structure of entry barriers is such that in the event of
cides whether to enter the industry or not and "I" decides entry firms believe that everybody, or at least the potential
whether to retaliate by engaging in a price war. The fic entrant, is worse off. However, when it comes to ex post sit
uations and entry has been made, the second type of equi
FIGURE 2 librium (Eq2) is likely to be the case.
If Porter's model holds, as long as firms pursue his rec
DESCRIPTION OF
A DESCRIPTION OFAN
AN ENTRY
ENTRY AND
AND ommended strategies, for example, "E" and "I" could pur
RETALIATION GAME sue "lower cost," but without necessarily engaging in a
fierce price war. This would imply Eq2 as the sub-game
100,000 Nash equilibrium.7 As long as "E" is able to earn profits
Not Enter ^ '
No
Ol O OO o 50,000 when entering the industry, the game illustrated can be eas
Retaliation a >
ily extended to allow for firms to choose among the other
Porter-recommended strategies. In case Porter's model
^— Enter
holds, the pursuit of these strategies would reward firms
Retaliation "-10,000; -10,000 with higher than average profitability (which directly re
lates to profits assuming equal capital/investment require
ments), though not necessarily with equal profit levels.
With entry, Eq2 would be stable for as long as both
tional outcomes, say profits, are given on the right of the firms earn more than in a retaliatory situation, which, in
arrows that end the game, where the first (left) outcome is
for "E" and the second (right) one for "I." The discussion based on Figure 2 refers to an entry-retaliation situa
tion where firms behave competitively to earn profits, excluding collu
Given the setting in Figure 2, there are two Nash equi
sive behavior. About this, Gabszewicz (1999) states that: "... one must
libria, Eql: ("Not Enter"; "Retaliation"), and Eq2:admit that several obstacles may arise to prevent the development of the
("Enter"; "No Retaliation"). Once "E" has entered the in entry scenario invented by economists. Some are related to specific cir
cumstances, others to the strategic behavior of incumbent firms. But
dustry, both "E" and "I" would prefer to be in Eq2, which
there is another way for these firms to avoid profit erosion, namely by
specifies "Enter" for "E" and "No Retaliation" for "I", as
means of collusion" (p. 9).
opposed to a position where "E" chooses "Enter" and "I" One additional point that we would bring here is that entry is assumed
to be non-costly, or that the rewards are net of costs. For our purposes
chooses "Retaliation." Hence, in ex post situations, Eq2
here, we will assume that entry is non-costly or net of costs but note
involves rational choices for both players. that "entry deterrent price" is also a concept that Porter refers to when
On the other hand, it might not always be straightfor discussing "threat of new entry." If entry costs are significant, the
game-theoretic outcomes will be different, which could also imply other
ward to see what Eql implies for firms' behavior. Eql spec
equilibia.

Porter's Model of Generic Competitive Strategies Business Economics • July 2008 59

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another example of Porter's analysis, could happen if one
firm has chosen "differentiation" and the other one "lower
cost." In the case of more than two firms, referring to
Porter's analysis, the situation would translate into choices
among the recommended and non-recommended strategies.
If Porter is right, those firms that choose recommended op
tions are better off, as long as all firms do not simultane
ously choose "Retaliation" type of choices. With firm
heterogeneity, firms with superior performance based on
Porter's prescription choose their unit costs, degrees of dif
ferentiation, or relevant strategic targets, but not necessar
ily the same for each firm.
While Foss and Mahnke acknowledge the advance
ment that game theory has brought into the analysis of
firms' competitive behavior through its tools based on log
ical reasoning, they do criticize this approach on the
grounds of the specification of equilibrium. According to
their study, since equilibrium is given from the outset (given
that games consist of sophisticated players who anticipate
each other's actions) it leaves no room for disequilibrium
situations, such as entrepreneurial discoveries or manage
rial change to create new opportunities. Explicitly, they
state that: "Most notably, there is no notion of an entrepre
neurial discovery procedure (Kirzner 1973), in the sense
that firm managers are not supposed to discover and act on
new opportunities in the market. Everything is essentially
given from the beginning and specified by the analyst"
(Foss and Mahnke, 1998, p. 6).
Based on this description of the role of game theory as
the core of the new industrial organization,8 we view Porter's
model of generic strategies as an attempt to explain firm
competitive behavior at a less aggregate explanatory level.
In other words, while game theory explains why some firms
are in and some others out of the industry, Porter's model
(1980) tries to provide a more detailed analysis of why some
of the firms already in the industry are more successful than
others.
Resource-Based Perspective
In the resource-based view, firms are considered to dif
fer in terms of efficiency because of the differences in their
competitive advantage due to endowed or acquired re
sources. Since imitation would diminish part of the com
petitive advantage that firms have, "the very concept of
s
Schmalensee (1988) also recognizes the contribution of game theory
but calls for more empirical research by stating that: "While game-the
oretic tools are well-suited in principle to the analysis of key aspects of
business behavior, their application has neither produced a general the
ory of market operation nor given one much reason to expect such a
theory to emerge in the foreseeable future. Under these conditions,
empirical research becomes critical to scientific progress" (p. 3).
60 Business Economics • July 2008 Porter's Model of Generic Competitive Strategies
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sustained competitive advantage is often defined in equi
librium terms: it is that advantage which lasts after all at
tempts at imitation have ceased. So, (zero imitation)
equilibrium is utilized as a yardstick to define and under
stand sustained competitive advantage" (Foss and Mahnke,
1998, p. 9). More generally, referring to Demsetz (1973),
Barney (1986, 1991), Rumelt (1987), Dierickx and Cool
(1989) and Peteraf (1993), a firm's competitive advantage
would be sustained if these criteria are met:
• resources are heterogeneous enough to account for ef
ficiency differences and rent;
• resources are ex ante economical (the present dis
counted value of their future prices is not higher than
their current price);
• resources are ex post non-imitable; and
• resources are not perfectly mobile across firms.9
In relation to Porter's model, the first two criteria would
appear to be met in the efforts that firms make to achieve
lower cost or differentiation positioning in the industry.
This, when combined with a broad or lower target, is sup
posed to yield a higher than average performance. Re
quirements of the "lower cost" or "differentiation" as well
as "focus" strategies illustrate such affinity, as, for example,
is the case of sufficient spending on advertising and R&D
or efforts to secure favorable inputs (low price or high qual
ity) that lower-cost producers and differentiators would
have to make in order to successfully pursue their recom
mended strategies.
The third and fourth criteria are not so straightforwardly
related to Porter's analysis, but they also could be consid
ered as being indirectly present there. If the firm's re
sources—or in Porter's wording, its requirements and
efforts—are being imitated or are perfectly mobile across
firms, there would be no differences across firms in terms
of their competitive advantage on cost or differentiation.
Hence, there would be no benefit in presenting their com
petitive advantage in two distinct dimensions, which, when
combined with the strategic target, would result in forming
the strategies in Figure 1.
Given these features of the resource-based perspective
and the discussion above, we would view Porter's model as
an attempt to explain firm competitive behavior at a more
aggregate explanatory level, compared to this perspective.
The concept of the firm's competitive advantage in this
model would represent the aggregation of differences in
9As far as the profit rates are concerned, while critically discussing the
notion of "barriers to entry," Demsetz (1989) also states that: "The
equalization of profit rates through competition, however, is a proposi
tion logically valid only with respect to investment on the margin of al
ternative economic activities. Only if all inputs are available in
perfectly elastic supply does this imply equality between average prof
its" (p. 25).
firms' resources.
Foss and Mahnke criticize the resource-based ap
proach on similar grounds to their critique of game theory.
They view it as lacking disequilibrium explanations. For
example, they state that: "... sustained competitive advan
tage exists only in (zero imitation) equilibrium (cf. Lipp
man and Rumelt, 1982); it simply makes no sense to speak
of sustained competitive advantage outside of equilibrium,
because equilibrium is defined as the absence of imitation.
... much of the important structure of the resource-based
perspective is solidly founded on equilibrium methodol
ogy" (Foss and Mahnke, 1998, p. 10). Another critical point
in Foss and Mahnke is that Porter, as well as the other two
subsequent alternative approaches discussed so far, ex
plains firm differences by relying on a given context (in
dustry) or endowment of resources (factors). They do not
account for other forms of firms' differences, such as learn
ing and entrepreneurship (managerial change, innovation,
etc.), which are explained endogenously.
A related extension of the resource-based approach,
called the knowledge-based view, has been put forward by
Hoskisson et al. (1999).10 Based on this view, firms are con
sidered to differ in terms of their current knowledge or their
potential in absorbing it. Referring to Kogut and Zander
(1992), firms are viewed as: "...a repository of capabilities
in which individual and social expertise is transformed into
economically valuable products This means that by its
tacitness and social complexity, a firm's stock of knowledge
is an important determinant of its competitive advantage,
(Hoskisson et al. 1999, pp. 441 —442j." Furthermore, refer
ring to Cohen and Levinthal (1990), learning and innova
tion are explained by the firm's potential to acquire
knowledge and use it for economically profitable ends. This
potential is dubbed "absorptive capacity," which is . .the
ability of a firm to recognize the value of new, external in
formation, assimilate it, and apply it to commercial ends.
Absorptive capacity is dependent on a firm's level of prior
related knowledge. As such, the ease of learning is affected
by the degree to which an innovation is related to this pre
existing knowledge" (Hoskisson, 1999, p. 442).
Putting this in the context of our earlier point regarding
the endogenous nature of innovation and entrepreneurship,
a firm's absorptive capacity could be the explanation for
the degree of learning and entrepreneurship if three condi
tions are met. First, innovation occurs as a result of cumu
lative knowledge and learning. Second—as long as learning
helps to build knowledge-based capacity—learning and
In their discussion, Hoskisson et al. (1999) refer to Porter's approach
as Structure-Conduct-Performance, which was our starting approach.
We do not consider Porter's analysis to represent SCP because, despite
their similarities, there are fundamental differences.
Porters Model of Generic Competitive Strategies Business Economics * July 2008 61
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knowledge-based capacity are important elements that lead
to innovation. Third, there is a strong correlation between
innovation and entrepreneurship, and such interpretations
of innovation could similarly extend to entrepreneurship.
Since entrepreneurship is a more abstract concept than in
novation, the last condition might come in handy in empir
ical analysis by giving one the ability to make use of
measures of innovation in deriving conclusions about en
trepreneurship as well.
Market Process Economics
The final approach to be discussed is the market
process view or market process economics, where the con
cepts of perfect competition and competitive behavior are
viewed as incompatible. Foss and Mahnke (1998. pp. 13,
14) cite Hayek (1948, p. 96): "The peculiar nature of the
assumptions from which the theory of competitive equilib
rium starts stands out very clearly if we ask which of the
activities that are commonly designated by the verb 'to
compete' would still be possible if those conditions were
all satisfied ... I believe that the answer is exactly none.
Advertising, undercutting, and improving (differentiating)
the goods and services are all excluded by definition—
'perfect' competition means indeed the absence of all com
petitive activities." Being in favor of such an explanation
of firms' competitive behavior, Foss and Mahnke (1998, p.
17) themselves state that: "Competitive advantage funda
mentally results from the subjective perception of profit op
portunities, the creation and exploitation of uncertainty, and
the coordination of learning and knowledge."
However, we view such concepts as subjective percep
tions, exploitations of uncertainty, or coordination of learn
ing and knowledge as difficult to make operational in
empirical analysis. Furthermore, although these elements
of conceptualizing competitive advantage are interesting,
it is not clear to what extent they are related to the expla
nations of learning and entrepreneurship, which, accord
ing to Foss and Mahnke (1998), are viewed as the
weaknesses of the previous approaches. Meanwhile, the
knowledge-based version of the resource-based perspec
tive provides at least an explanation of this.
In addition, we would argue that Porter's model, game
theoretic models, and the resource- based perspective all
provide their own prescriptions as the appropriate re
sponses to the pursuit of profitability. Also, there is a need
to deal with uncertainty and coordination of learning and
knowledge in these approaches. Finally, competitive ad
vantage of firms would be best viewed as a means to their
superior performance rather than an end, since in compe
tition it is often the profit that becomes the ultimate bench
mark against which one gauges this performance.
 Given this, a good start in evaluating a firm's competi
tive advantage, or generally a firm's competitive behavior,
is to make full use of those approaches that rely on more
empirically verifiable approaches, such as Porter's model.
With a sound knowledge in place on the applicability of
these approaches, research could then move on more confi
dently to a more abstract analysis. Since, at least for Porter's
model, the body of research so far has not yet done enough
to confidently establish its validity in explaining perform
ance differences across firms in terms of their competitive
advantages and strategies, it is important to critically assess
its applications as well as to rigorously test the model's pre
scriptions empirically. In this article, we suggest starting
from Porter's model to analyze firms' behavior.
2. Why Porter's Model?
There are a number of reasons for using Porter's model
to evaluate firms' competitive behavior. The first is its pop
ularity. Porter, and especially his 1980 model, has had a
major impact on the area of business strategy and on the
field of industrial economics as well. For example, Miller
and Dess (1993) found that over 1986—1990, Porter's 1980
work was referred in almost half of the papers in the Strate
gic Management Journal. We also undertook a quick search
to find out the approximate number of citations of this work
in a number of journals. We did this in July 2005, using the
"Business Source Premier" database.11 We found that there
were a total of 896 references to Porter, of which 807 had
cited his 1980 model.12
The second reason for using Porter's model is its well
defined structure. By looking at the framework of three
generic strategies, we see that the concept of competitive
advantage and strategy has been explained within a well
structured setting. The model presents a "general rule" for
a firm's strategy. It is contended that firms that follow the
rule or the recommended strategy will attain competitive
advantage and perform better than firms that do not. The
benefit of using a well-structured model for analyzing the
competitive advantage of firms is that it provides some cri
teria or benchmarks against which firms can be easily an
alyzed and compared in ex post situations.
Closely linked to this, another reason is the feasibility
of the model's framework for empirical analyses. The ap
plication of such a model to real life situations becomes
"As the world's largest full-text business database, Business Source
Premier provides full text for more than 3,650 scholarly business jour
nals, including full text for nearly 1,100 peer-reviewed business pub
lications. Coverage includes virtually all subject areas related to
business. This database provides full text (PDF) for more than 300 of
the top scholarly journals dating as far back as 1922. This database is
updated on a daily basis via EBSCOhost" (Oxford Libraries Information
Platform, 2005). Searching under the 'Cited References' option, we
used the words 'porter, michael' in the 'Cited Author' choice and 'com
62 Business Economics • July 2008 Porter's Model of Generic Competitive Strategies
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feasible since identifying and selecting those firms that
have achieved competitive advantage and chosen the rele
vant strategic targets becomes a fairly straightforward
process. One can simply place these firms within the frame
work and assess whether they fall within the recommended
alternatives or not. The more feasible a model is, the eas
ier the comparison of firms can be made; and consequently,
the easier conclusions about competitive advantage and
performance are reached. This may be especially helpful in
empirical settings where problems with data quality are
prevalent. A feasible model gives the researcher a useful
tool to quickly see whether the information from the obser
vations fits the model's dimensions or not, discarding those
observations with ambiguous information.
The fourth reason is the clarity of the model's main con
cepts. The model of generic strategies presents a clear and
easily comprehensible way of analyzing how a firm can at
tain competitive advantage and perform better and also
when it fails to do so. The concept of competitive advan
tage can be understood without difficulty by theorists, prac
titioners and the lay audience because the meanings of
lower cost and differentiation (in terms of quality at least)
are relatively straightforward. In a world of many different
cultures, languages and firms' practices, the terminologies
used, especially those in theory and business, can some
times be far from consistent. This is particularly true when
a theory is translated into other languages for research
and/or teaching purposes. Furthermore, differences in ter
minology can also pose serious problems to fully absorb
what a theory suggests for real-life business practices, es
pecially where they are applied in contexts that differ sub
stantially from those in which the theory first originated.
Where researchers and professionals need to engage in in
terpreting and adapting theoretical concepts into compre
hensible and practicable terms, a model that possesses
clarity in its original format is a valuable asset.
The fifth reason is the model's combination of simplic
ity and generality (as it claims, at least). As seen earlier,
Porter has presented his 1980 model in such general terms
that it can encompass any type of industry and firm. In ad
dition, the model has a notable simplicity in terms of the
main elements that make up the competitive strategies.
Since efforts to reach simplicity are sometimes associated
with the reduction of the number of details or elements of
petitive strategy in the Lited litie choice. Business Source rremier
is now under the name "Business Source Complete," which is a further
improved version of this database.
We believe that the actual number of citations in the "Business
Source Premier" database was even larger since we did not include a
number of citations in our count, for example, because they had not
written specifically the year "1980" in their references list. However,
it was clear to us that they were referring to Porter's 1980 model.
a model, the accuracy of representation may inevitably be
put into question. The trade-off between simplicity and rep
resentation is a subject of debate in every science, but the
relatively low confidence in finding universal and perma
nent laws governing the nature of social phenomena can
make this issue more debatable in economics, and even
more so in business studies. Although it is through empir
ical analyses that models are assessed in terms of their abil
ity to capture the essence of a more complex reality, a
simple and general model remains desirable in every field.
The final reason is what we would call the model's com
plementary role to two other approaches of competitive ad
vantage of firms. As argued in the previous section, in our
view Porter's model represents a rather high degree of de
tail in the specification and explanation of firms' competi
tive behavior. While game theoretic models are concerned
with even broader consideration of strategy, they do not
generally engage in a detailed explanation of the specific
actions of firms while choosing one action in the tree of the
game. There are, of course, studies within game theory that
do consider detailed actions of firms' competitive behav
ior, but as an overall approach to strategy, it is more con
cerned with the context of competition rather than
competitive actions, per se.
Porter's model describes the competitive behavior of
firms more specifically than game theory, though such be
havior is still viewed as generic at the broadest level of a
firm's strategy planning and implementation process. In
order to be successful in the pursuit of one of the recom
mended generic strategies, firms should meet a number of
requirements. However, the model itself is reasonably gen
eral since it incorporates a myriad of factors and conditions
for firms into a three-generic-strategy approach with five
recommended strategic options. On the other hand, as
noted in the discussion of the previous section, the re
source-based perspective specifies firms' competitive be
havior in more detail by looking at how the resources
should be used in order for firms to be able to reach and
maintain competitive advantage.
Given this interpretation, Porter's model has a comple
mentary feature to game theoretic models and the resource
based perspective. The advantage of starting with Porter's
model is that the knowledge gained from its applicability
can provide a useful basis for further investigations along
the lines of a broad contextual approach based on game the
ory or a more detailed intra-firm approach based on the re
source-based perspective or the knowledge-based variant.
3. Concluding Remarks
In this final section we provide some concluding re
marks and suggestions for future research. We have pre
Porter's Model of Generic Competitive Strategies Business Economics • July 2008 63
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sented Porter's model along with some other alternatives,
the Structure-Conduct-Performance as a classical and start
ing paradigm, the New Industrial Organization and Game
Theory, the Resource-Based Perspective, and the Market
Process. These approaches to the firm's competitive be
havior were reviewed based on their relations, similarities
and differences, with the focus on Porter's model.
The context of firms' competitive strategies in Porter's
analysis consists of five competitive forces: threat of new
entry, rivalry intensity, pressure from substitute products,
bargaining power of buyers, and bargaining power of sup
pliers. According to Porter, the joint influence of these
forces determines the industry's intensity of competition
and average profitability. Porter's model of generic strate
gies encompasses the main strategic options that firms pur
sue regardless of the type of industry and the firm's
business. There are two main dimensions in this model:
competitive advantage, which can be in the form of lower
cost or differentiation; and strategic target(s), which can be
found in terms of geographic areas, market segments
served, or range of products offered.
Porter's three recommended strategies are "lower cost,"
"differentiation," and "focus." Focus can be of three kinds:
"cost focus," "differentiation focus," or "cost and differen
tiation focus." The non-recommended option that is viewed
as the worst strategic position is what Porter calls "stuck
in the middle." According to Porter, the recommended
strategies reward firms with higher than average profitabil
ity, and the "stuck in the middle" strategy inevitably yields
poor performance. In relation to the other approaches re
viewed, Porter's model is considered as an insightful and
convenient approach to analyzing the firm's competitive be
havior for a number of reasons. These reasons are its pop
ularity, well-defined structure, feasibility, clarity, simplicity
and generality, and complementary role to two other main
approaches to analysis at the aggregate level.
Although insightful and convenient, whether Porter's
model is also a useful approach to predict superior per
formance is another issue and an important research topic.
The knowledge of the usefulness of Porter's model would
be enhanced if a number of studies that relate to this model
are critically reviewed. In conducting such a review, it
would be best not only to point out the findings of the stud
ies reviewed, but also—more importantly—to assess their
conceptualization of Porter's model as well as the method
ologies deployed. After this literature review, it would also
be of interest to compare new empirical evidence with that
found in the studies reviewed. B
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