Approaches of Michael Porter and Gary Hamel to Markets and Resources.
Approaches of Michael Porter and Gary Hamel to Markets and Resources.
The 1970s saw the emergence and rise of marketing based firms. In the early years of
capitalism the main requirement to succeed in business was the production of a quality product.
If the product was durable and useful then selling at a profit will not be a problem. This at the
time was called production orientation and the products were sold effortlessly. These was after
the war in the 1950s when there was ready demand for the products but later the market was
saturated and sales dwindled. Production orientation gave way to sales orientation. It was argued
that sales orientation worked backwards, that’s instead of producing goods then trying to sell
them to potential customers they would rather start with the potential customer and enquire what
they wanted and produce the goods as per the customers’ needs. The customers became the main
force behind all the strategic decisions. These led to the marketing orientation which for decades
since its formulation it has been repackaged as customer orientation besides other names like
customer philosophy, customer focus among others.
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Michael porter was an American business economist who has contributed greatly in
analytical and lineal positions in the industries. He is the founder of generic strategies. Gary
Hamel is a strategist who has excelled in strategic intent and core competence.
In the early 1980s, Gary Hamel argued that organizational improvement and development
was being driven by incrementalism not forces of strategies’. Companies were downsizing and
continuously improving their quality in an effort to get bigger and better. The effort of all these
was to minimize cost until there was nothing left to save.
There were other new forces at play that were changing the competition and the root of
traditional companies that benefitted from primacy in the past. They were affected by a)
Privatization mostly in the airline industry and banking services) Blurring, division and rapid
growth of computer and other communication industries. C) Short changing customers in terms
of quality, price or service. d) Gradual decreases in technological growth especially the internet.
Hamel argues that a compelling and a dynamic view of the future is a must if one needs
to progress and be free from the formalities of the past and highlights the many companies that
lost a lot of money because they were not dynamic and they got stuck for a long time in the same
game instead of advancing and moving forward. While the future view is not very certain or
perfect, it’s essential to have a view of some nature in order to develop in addressing corporate
image, aid planners and decision makers(.Hamel, 2000) Hamel concurs that, while we all
recognize a good strategy once it succeeds; we find it difficult to create new strategies. He argues
that generation of strategy is not a process that is wholly analytical but also multi-faceted and
risky. In 2000, Gary came up with the word strategic convergence that explained the limited
position of strategies being used by competitors in diverse circumstances. He concluded that
Approaches of Michael Porter and Gary Hamel to Markets and Resources.
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strategies narrow down to a few as the more succeeful ones get imitated and copied by the firms
that were not designed for them and they do not understand their applications. Strategic
convergence includes designing and implementing a custom strategy for nature of each situation.
Strategic decay is a concept that the value and nature of all strategies, no matter how well
crafted, decays over time. Strategy innovation is one way for newcomers to succeed in an
environment where there is enormous limitation of resources. While some strategies are adopted
from analysis, others are from visions and inspiration. To adopt good strategies, that’s neither too
random, ordered or too ritualistic, Hamel looks at the roots which he regards simply as
organizational life.Hamel turns the revolutionary concepts into action points and urges firms to
adopt new strategies ( Hamel, 2000).
Probably the best and most influential strategist, Mr. Michael Porter, introduced new
principles and concepts including strategic strength and strategic scope. Strategic scope is based
on demand and looks at the composition and size of the target market. Strategic strength is based
on supply side and analyzes the strength of core functions and competency of the industry. He
identified and grouped two competencies that were important: Product differentiation and cost.
He initially arranged each of the three sides (rank of differentiation, relative cost of product and
the nature of target market) as low, medium, high and joined them in a cube. It displayed 27
combinations but most was not useful. The competitive strategy is simplified to the best three
only. These are differentiation, markets segmentation and leadership. Market segmentation is
smaller and narrower while both leadership and market differentiation have a broad market
scope. Empirical research on the impact of profit on marketing strategy indicated that the
Approaches of Michael Porter and Gary Hamel to Markets and Resources.
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companies with a higher market were always profitable and also the same as the firms with low
market share were not profitable.
This was referred to as the hole in the center. Michaels explanation of these companies
with market shares that are high were profitable because they adopted a cost leadership strategy
and companies with lower market share were also successful because they adopted market
segmentation and concentrate on a small area but with a profitable market. Firms at the center
were less profitable because they didn’t have a viable generic strategy. Porter tried mixing
multiple strategies and was successfully in one case only. Combining segmentation market
strategy and differentiation product strategy was seen as an effective way. Some observers have
made a clear distinction between cost leadership that’s reduced cost strategies and the best
strategies at affordable low rates. They say that a low cost strategy is not able to give a
sustainable competitive relative advantage. The firms end in price confrontations or wars.
Cost leadership is a strategy involving a company winning market share by marketing to
cost conscious or price responsive customers. (Porter, 1980) This is done by reducing the prices
in the segment markets to the lowest. To operate at the lowest prices and still make a profit and
maintain a high returns, the companies must operate at the lowest cost than its competitor. There
are three ways to do it.
The first approach is to target high asset sales. It means production of high volume of
production. This increased production will reduce cost per unit of output and also reducing
coverage per unit of fixed cost. The company takes advantage of the economies of scale and
experience high curve effect. For heavy industrial firms, mass production is a good option and it
results in high market share. It creates a natural barrier to rivals who may want to enter the
market as the low cost will act as a deterrent They will not be able to match the company’s low
costs and prices.
The second method is targeting reduced direct and indirect operating costs. This is done
by offering high volumes of products and customization of standard products. Production costs
are minimized using fewer components and limiting models produced to ensure larger
production is not interrupted. Overhead are kept at minimum i.e. wages are kept low and
Approaches of Michael Porter and Gary Hamel to Markets and Resources.
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industrial rental buildings located at low rental areas. To maintain these strategy every aspect of
cost control is applied. This may include outsourcing, limiting production cost and utilizing all
the assets to maximum capacity. The related distribution strategy is to acquire the most extensive
and effective distribution possible. Promotional Strategy often includes trying to make the best
out of the low cost available product details.(Porter, 1980).
The third method is to control the supply or procurement chain to maintain low costs.
This is done by buying in bulk and earning quantity discounts, reducing supplier’s prices,
establishing competitive bidding processes and working with retail vendors to keep stocks low
using trading methods such as just-in-time method of purchasing. Wal-Mart is famous for
squeezing its suppliers to reduce cost and ensure low prices for its goods. Dell computers
originally achieved market share by ensuring low stocks and only building or manufacturing
needed and ordered computers only. Other purchasing advantages could come from other access
of raw production materials required.
Some Cost leadership strategies are applicable to big industries with the opportunity to
enjoy large economies of scale and high production volumes. However this takes a controlled
industrial view of the strategy. Small and medium businesses can be cost leaders if they enjoy
advantages in line with small businesses. For example, if a small restaurant in a residential
neighborhood can offer cheap service or products where other industries in the peer group are
charging higher than them then it can attract price responsive customers even from their homes
as the prices are friendly. This is achieved by paying low salaries and minimizing all fixed and
variable costs. Another example is in an airline where despite having a low number of planes
than the larger airlines, it instituted cost cutting measures to reduce cost and prices and thereby
able to achieve market growth per share.
Differentiation strategy is convenient where the needed customer segment is not price responsive
and the market is very competitive and saturated, customer’s needs are very specific and are
under served and the company has rare resources and capabilities which make it satisfy these
needs that are hard to copy. These are for example intellectual property rights, patents and music
copyrights. Successful management of brand achieves good results if it positively contributes to
the sales volume and production also increases. This way Nike could brand sports shoes and star
bucks could brand coffee.
The unlimited resources model makes use of a large array of resources that allows
companies to compete by enrolling the differentiation strategy. A firm with large resources can
manage risks and maintain profits easily than one with limited resources. A firm that lacks
innovative strategy can’t survive for long.
Organizational structure, development and implementation follow strategy, and follows company
structure. Porter’s generic strategies explain the interactions between minimization of cost
strategies and strategy of market focus. He provided a challenge to managers view their
industries in terms of value chain. A firm will succeed only if it positively contributes to the
Approaches of Michael Porter and Gary Hamel to Markets and Resources.
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overall industry’s chain. This compels management to view its operations from the customers
point and what value it adds to the advantage of the customer.
The main role of strategic management is to identify and implement the core competence
and then assemble assets that will add value and maintain a competitive advantage. There are
three main types of capability Organizational structure, reputation and innovation. Though Porter
had a major rationalization in his concept about the non viability of the hybrid business strategy,
the volatile and turbulent conditions of the market will not allow survival of the rigid strategies
since long term establishment will depend on the responsive of the market.
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References
Hamel, G (2000) leading the revolution Boston, Mass: Harvard Business School Press,
Hambrick, D, (1983) “An empirical typology of mature industrial product environments”
Academy of Management Journal, 26: 213-230
Murray, A.I. (1988) “A contingency view of Porter’s “generic strategies.” Academy of
Management Review, 13: 390-400.
Miller, D., (1992) “The generic strategy trap” in The Journal of Business Strategy 13(1):37-41
Porter, M, (1980) “Competitive Strategy: Techniques for analyzing industries and competitors”
New York: The Free Press
Wright, P, (1987)”A refinement of Porter’s strategies.” Strategic Management Journal, 8: 93-101
Wright, Peter, Kroll, Mark, Kedia, Ben, and Pringle, Charles. (1990) Strategic Profiles, Market
Share and Business Performance. Industrial Management, May 1, pp23-28.
