SEO Marketing Research

SEO Marketing Research header image 2

The concept of industry organization

52 Comments · Marketing Research

The major influence of the concept of industry organization started to take place in the 1930s Mason (1939) and Ban (1956, 1968) as well as Porter (1980, 1985) can be mentioned as representative authors.

Principal assumptions of this concept are that organizations are characterized by a maximizing behavior and are able to make rational choices of known alternatives. In this perspective, performance is determined by industry structure.

In the world of industrial organization, market power defines the attributes of industry structure, which determines conduct (strategy), which in turn determines industry performance.

The nature of generated rents is Chamberlinean, i.e. firms achieve monopoly rents. Industries, firms and products are the fundamental units of analysis.

The role of industrial structure is interpreted as exogenous (Teece et at., 1997: 527) The principal concern of industrial organization is the structure-conduct-performance (SCP) model to assist policymakers in developing economic policy, to identify socially optimal and competitive industries and design regulations to produce optimal levels of intra-industry competition.

Structural conditions and competitor positioning are the focus of attention. Industrial organization delivered a first synthesis of strategy development based on economic explanations.

The explanations for persistence of profit (performance) are based on the impediments to the elimination of profit rather than traditional explanations based on leadership, clarity of purpose and notions of “fit.”

Porter (1981) sees a clear cross-fertilization between strategic management and industrial organization, especially because industrial organization can provide help with analyzing strategic choices of a firm in an industry and offers new analytical techniques as well as new methodological concepts in strategic management research.

When applying industrial organization concepts to strategic management, Porter acknowledged that firms cannot only be influenced by the industry structure but can also themselves actively influence industry structure.

Because of Porter’s work it became widely accepted that firms operating in markets that are far from perfect competition are nevertheless not captives of the market forces.

For long periods the strategic choices of firms can be relatively independent of environmental determinism.

Besides, he has shown that competition in imperfect markets drives strategy development.

Porter’s contribution to the explanation of competitive advantages lies in the fact that he reaffirmed SWOT analysis, pointing out the value of Andrews’ (1971) SWOT framework as a starting point to consider the development of strategies.

In terms of SWOT analysis, what Porter accomplished was to introduce meaning and content into the framework by identifying the forces and nature of competition as the principal components concerned with environmental threats and opportunities.

Strategic contributions derived from Porter’s (1980, 1981) application of the SCP model to firms and his classification of sources of market power into five competitive forces.

To further systematize industries Porter (1980) and other strategies introduced strategy group analysis into the held of strategic management.

A strategic group is a set of firms within an industry that are similar to one another and different from firms outside the group with regard to one or more key dimensions of their strategy (Porter, 1979).

Analyzing strategic groups requires the recognition that not all firms compete directly or equally with each other in a certain market.

By identifying its own strategic group a firm can better find close and distance competitors and analyze likely competitive implications of strategy changes.

In this context Porter also drew attention to the existence of so-called “mobility barriers” that make it difficult for firms to change from one strategy to another or pursue more than one strategy simultaneously.

Porter (1985) developed the generic competitive business strategies, cost leadership, differentiation and focus, to achieve competitive advantage.

Pursuing the competitive strategy of overall cost leadership, a firm aggressively constructs efficient scale facilities and reduces costs through experience, lowering overheads, etc.

Differentiation as the alternative competitive strategy in terms of Porter’s framework of thoughts means the ability of a firm to provide unique and superior value to customers with regard to quality, special features or after-sales-service, for example by brand names, technological leadership, customer service or dealer networks.

As a third possibility of a generic competitive strategy Porter outlines the focus strategy as a concentration of efforts on a particular group of buyers, a segment of the product line or a geographic market.

A focus strategy can either be based on cost or on differentiation advantages. For Porter, a firm has to pursue one of the outlined strategic directions to avoid ending tip “stuck in the middle” with no competitive advantages (Porter, 1985: 11-17).

Porter’s application of mobility barriers, industry analysis and generic strategies to the field of strategic management was broadly accepted in a very short time in strategic management teaching, consulting and research (Rumelt et al., 1991: 8).

Porter did not fully ignore internal firm features, but developed a value-based system of management derived from analysis of supply and value chains (Porter, 1985: 33-61).

A firm in this perspective is seen as a chain of activities for transforming inputs into outputs that the customers value.

The process of transforming inputs into outputs is composed of a number of primary and support activities, and each of these adds value to the product or service.

While primary activities are concerned directly with the design, creation and delivery of the product as well as its marketing, support and after-sales service, the support activities provide inputs that allow the primary activities to take place.

To reach a competitive advantage the different activities of the value chain have to be fulfilled at lower costs and or add more value than the competitors.

Porter (1991) further elaborated this internal view of the firm in terms of activities by conceding that advantage derived ultimately from “activities” which enabled market imperfections to be exploited.

For Porter (1996) it is essential in this context to differentiate between operational effectiveness and strategy.

Operational effectiveness (OE) means to perform similar activities better than rivals perform them (this concept includes but is not limited to efficiency), while strategic positioning means to perform different activities from rivals’ or to perform similar activities in different ways.

Management tools that fall under the category of “operational effectiveness” (e.g. TQM, benchmarking, outsourcing or re-engineering) in Porter’s view more and more substitute strategy.

Porter (1996) in this context stresses that firms often fail to distinguish between the two, which leads to increasing competition in many areas.

Even though Porter sees operational effectiveness as necessary, it is not sufficient to achieve competitive advantages.

Strategy for Porter (1996) has to rest on unique activities and deals with the choice to perform activities in a different way to rivals.”

Strategy leads to competitive advantage for Porter (1996) when it deals with the combination of activities and not with the achievement of excellence with regard to individual activities or functions.

The literature from the area of industry organization incorporated the knowledge derived from theories of perfect and imperfect competition into a paradigm in which it was assumed that the industry structure in which individual firms were represented determined the performance of these firms (Bain, 1956, 1968).

This assumption led to the situation that firm conduct (strategy) was not regarded as important.

In this context Porter (1980) proposed that firms are able to influence industry structures actively and passively by taking advantage of market imperfections.

Porter proposed that business strategy is about changing industry structures and performance.

He developed a theory of competitive strategy (Porter 1980, 1985). In this theory Porter used the various forces that characterize industry structure from the industry organization literature to define the nature and extent of competition confronting individual firms.

Porter contributes relevant ideas and tools such as the competitive forces model and strategic group analysis to the explanation and understanding of Competitive advantages.

Porter’s work made widely accepted the fact that firms operating in markets that are far from perfect are nevertheless not captives of the market forces.

For long periods the strategic choices of firms can be relatively independent of environmental determinism.

In addition, he has shown that competition in imperfect markets drives strategy development.

By developing the generic competitive strategies of cost leadership, differentiation and focus, Porter stressed the importance of demand and supply forces operating in different market structures in which efficiency and innovation are necessary requirements.

Porter further contributed insights into how firms compete. He introduced the concept of the value chain (a disaggregated production function) which has since been extended into considerations of supply and demand chains.

While the value chain was not the ultimate source of advantage in Porter’s schema, it served as the basis upon which competitive strategies were developed.

Porter postulated that the ultimate source of advantage was what he called “activities” associated with value chains. Porter (1991) did not elaborate the concept of “activities.”

Tags:

52 Comments so far ↓

Leave a Comment