Management Theory of Michael Porter

The management theory of Michael Porter

Rita McGrath, a strategy professor at Columbia Business School as well as a C-suite strategist and author, emphasized Porter’s influence. “As one of the ‘Lords of Strategy,’ as [business journalist] Walter Kiechel called [Porter], his ideas had a profound influence, both on the academic field of strategy and with practitioners,” McGrath explained.

Porter’s theory focuses on several models, the most practical of which are value chain analysis and the Five Forces Model.

Value chain analysis

Through value chain analysis, Porter defined effective supply chain management. He presents a model that categorizes the activities that form a company’s product-delivery system as either primary or support activities; it shows how they work together to build profit.

According to Porter, the five key activities that result in higher profits are:

• Inbound logistics: This includes receiving, storing and managing raw materials, as well as managing supplier relationships.
• Operations: Operations are the necessary procedures to convert raw materials into finished goods.
• Outbound logistics: Outbound logistics cover all necessary activities to deliver finished goods to the customer.
• Marketing and sales: This includes advertising, promotion, pricing, and other strategies to increase visibility and reach the right customers.
• Services: Services include activities to maintain offerings and improve the customer experience.

Porter’s Five Forces

Porter’s Five Forces model analyzes competitive forces in an industry. It identifies key areas that help organizations understand their industry’s unique dynamics. Also, it develops business management strategies to gain a competitive advantage.

McGrath explained that the Five Forces model stemmed from economists’ efforts to understand monopolies and how they might affect future regulations. In Porter’s application, businesses can leverage competitive forces to guide their choices, decisions and even create a pseudo-monopoly in their chosen market.

The Five Forces can be consolidated and summed up as follows:

1. Bargaining power of suppliers.

The bargaining power of suppliers assesses suppliers’ influence over an organization. Factors like the availability of alternative suppliers, the uniqueness of products or services, and their ability to dictate terms and prices affect the organization’s strategic position.

2. Bargaining power of buyers.

Likewise, the bargaining power of buyers or customers is also examined. That will determine an organization’s sensitivity to price changes and its ability to set prices and stay profitable.

McGrath illustrated this concept with an example: “In IBM’s mainframe heyday, for example, they had both product advantage and reputational advantage, allowing them to charge premium prices,” McGrath explained.

3. Threat of new entrants.

The threat of new entrants evaluates the likelihood of new competitors entering the industry. Barriers to entry determine the potential threat posed by new entrants and may include the following:

• Economies of scale
• Brand loyalty
• Regulatory requirements
• Access to distribution channels

4. Threat of substitute products or services.

Meanwhile, the threat of substitute products or services considers the availability of alternatives that can fulfill the same customer needs currently being filled by an organization. The ease of substitution and the perceived value of alternatives affect the organization’s pricing power and market share.

5. Intensity of competitive rivalry.

This force examines the level of competition within an industry. Factors such as the number and diversity of competitors, market growth rate, differentiation strategies, and exit barriers influence it and its effect on an organization’s profitability. To mitigate this threat, businesses must focus on differentiation and innovation. This way, they can stand out from the competition and maintain customer loyalty.

McGrath noted that industries with few competitive rivals often have significant pricing power. “To the extent that rivalry in your industry is low, you are less likely to have to cut prices or make concessions,” explained McGrath. “Patented and essential pharmaceutical products are like this — you can charge a lot when you are the only game in town.”

Tips for implementing Porter’s management theory

Applying Porter’s management theory and models can help small businesses increase their market share and profitability. Here are a few tips for successfully implementing Porter’s principles into your operations.

Gain a thorough understanding of Porter’s management theory

Numerous websites provide valuable information about Porter’s theory. In addition to diagrams and summaries of these management principles, you’ll find various videos, instructional materials and tools. They can help you develop the background knowledge and practical expertise to put Porter’s theories to work for your company.

You can also work with professionals or hire experts familiar with Michael Porter’s management theory. These experts can guide you in maximizing the benefits of his principles within your company’s unique environment.

Choose the right markets

Take the time to analyze Porter’s Five Forces with regard to your business’s current or prospective markets. This can give you a starting point for which markets are most likely to yield success.

“For small businesses, the key implication of this theory is to select markets where these factors are likely to line up in your favor and avoid those in which you are not in a more favorable position than anyone else,” McGrath advised.

Keep in mind that your ideal markets today may be less favorable down the line, especially when it comes to competition. McGrath noted that the direct-to-consumer model — which became increasingly saturated over time and has radically transformed market dynamics — is a prime example of this.

Adopt a customer-centric approach

Understand your customers’ needs, preferences and buying behaviors. Tailor your products, services and marketing strategies to effectively meet those needs. Focus on building strong relationships with customers, enhancing customer satisfaction and differentiating your offerings to increase their value to your customers.

Foster strategic partnerships and emphasize innovation

Identify potential partners, suppliers, or distributors who can enhance your value chain or provide other strategic advantages. Cultivate strong relationships and collaborative strategic partnerships that enable shared benefits, resource sharing and mutually beneficial outcomes.

This focus can also help foster a culture of team innovation within your organization. Encourage employees to generate and implement creative ideas that drive product development, process improvement and market differentiation. Stay attuned to market trends, technological advancements and adapt your strategies accordingly.

Monitor and adapt

Put Porter’s theories to use and continuously monitor changes in your industry, competitive landscape and customer preferences. Regularly assess the effectiveness of your strategies and make necessary adjustments to improve your results. Stay open and responsive to market dynamics and maintain a proactive approach to strategic management.

Alternatives to Porter’s management theory

Porter’s management theory is just one of many that can support your business’s success. Here are some alternatives to Porter’s approach that may work for your organization:

• Classical and scientific management theory: Frederick Taylor developed the classical and scientific management theory in the early 1900s. This theory centers on increasing productivity. It focuses on identifying the optimal way to complete any job — including appointing the right employees to each task and providing workers with the necessary tools to accomplish their work.
• Contingency management theory: Also known as Fred Fiedler’s theory of leadership, the contingency management theory analyzes how different situations and factors can influence the ideal management approach at any given time. Fiedler’s approach considers an individual’s leadership style — task- vs. relationship-oriented — and situational favorability.
• Drucker’s management theory: Often referred to as the father of modern business management, Peter Drucker is well known for his management theory; it has multiple elements embedded in other theories. The management theory of Peter Drucker hinges on several key principles, including prioritizing adaptability and innovation, focusing on results, and striving to inspire and lead employees in a positive direction.
• Juran’s management theory: Joseph Juran, a pioneer in quality management, developed a theory that focuses on three key principles for increasing product and service quality. The management theory of Joseph Juran introduces the Juran Trilogy — quality planning, quality control and quality improvement — and hinges on understanding customer needs and securing full leadership commitment. By focusing on these factors, businesses can incorporate product quality from the initial design process, thereby increasing customer satisfaction and loyalty.
• Mintzberg’s management theory: Henry Mintzberg’s management theory aims to help business leaders conceptualize their organizational type and management structure. According to Mintzberg’s theory, breaking down an organization’s structure (including management roles and responsibilities) increases efficiency and improves employee engagement. This practice allows workers to understand their roles and develop their skills accordingly.
• Weber’s management theory: German sociologist Max Weber believed that bureaucracy, characterized by a clear power distribution and unambiguous rules, was the most efficient business model. Max Weber’s management theory emphasizes the importance of leveraging structured rules and processes. It will ensure responsibilities are divided based on expertise, employees are treated equitably, and expectations and procedures are clearly outlined.