Michael Porter

The second important guru in the Management tradition is Harvard Business School professor Michael Porter. Porter was already established as a leading business strategy theorist, but in his 1985 book, Competitive Advantage, he moved beyond strategic concepts, as they had been described until then, and argued that strategy was intimately linked with how companies organized their activities into value chains, which were, in turn, the basis for a company's competitive advantage (Porter 1985).

Figure 5 provides an overview of a value chain as described Michael Porter described it in Competitive Advantage.

A Value Chain supports a product line, a market, and its customers. If your company produces jeeps, then you have a Value Chain for jeeps. If you company makes loans, then you have a Value Chain for loans. A single company can have more than one value chain. Large international organizations typically have from 5 to 10 value chains. In essence, value chains are the ultimate processes that define a company. All other processes are defined by relating them to the value chain.

Fig. 5 Michael Porter's value chain

Put another way, a single value chain can be decomposed into major operational process like Market, Sell, Produce, and Deliver and associated management support processes like Plan, Finance, HR and IT. In fact, it was Porter's value chain concept that emphasized the distinction between core and support processes. The value chain has been the organizing principle that has let organizations define and arrange their processes and structure their process change efforts during the past two decades.

As Porter defines it, a competitive advantage refers to a situation in which one company manages to dominate an industry for a sustained period of time. An obvious example, in our time, is Wal-Mart, a company that completely dominates retail sales in the US and seems likely to continue to do so for the foreseeable future. “Ultimately,” Porter concludes, “all differences between companies in cost or price derive from the hundreds of activities required to create, produce, sell, and deliver their products or services such as calling on customers, assembling final products, and training employees.. .” In other words, “activities... are the basic units of competitive advantage.” This conclusion is closely related to Porter's analysis of a value chain. A value chain consists of all the activities necessary to produce and sell a product or service. Today we would probably use the word “processes” rather than “activity,” but the point remains the same. Companies succeed because they understand what their customers will buy and proceed to generate the product or service their customers want by means of a set of activities that create, produce, sell and deliver the product or service.

So far the conclusion seems like a rather obvious conclusion, but Porter goes further. He suggests that companies rely on one of two approaches when they seek to organize and improve their activities or processes. They either rely on an approach which Porter terms “operational effectiveness” or they rely on “strategic positioning.” “Operational effectiveness,” as Porter uses the term, means performing similar activities better than rivals perform them. In essence, this is the “best practices” approach we hear so much about. Every company looks about, determines what appears to be the best way of accomplishing a given task and then seeks to implement that process in their organization. Unfortunately, according to Porter, this isn't an effective strategy. The problem is that everyone else is also trying to implement the same best practices. Thus, everyone involved in this approach gets stuck on a treadmill, moving faster all the time, while barely managing to keep up with their competitors. Best practices don't give a company a competitive edge – they are too easy to copy. Everyone who has observed companies investing in software systems that don't improve productivity or price but just maintain parity with one's competitors understands this. Worse, this approach drives profits down because more and more money is consumed in the effort to copy the best practices of competitors. If every company is relying on the same processes then no individual company is in a position to offer customers something special for which they can charge a premium. Everyone is simply engaged in an increasingly desperate struggle to be the low cost producer, and everyone is trying to get there by copying each others best practices while their margins continue to shrink. As Porter sums it up: “Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day.”

The alternative is to focus on evolving a unique strategic position and then tailoring the company's value chain to execute that unique strategy. “Strategic positioning,” Porter explains, “means performing different activities from rivals' or performing similar activities in different ways.” He goes on to say that “While operational effectiveness is about achieving excellence in individual activities, or functions, strategy is about combining activities.” Indeed, Porter insists that those who take strategy seriously need to have lots of discipline, because they have to reject all kinds of options to stay focused on their strategy.

Rounding out his argument, Porter concludes “Competitive advantage grows out

of the entire system of activities. The fit among activities substantially reduces cost or increases differentiation.” He goes on to warn that “Achieving fit is difficult because it requires the integration of decisions and actions across many independent subunits.” Obviously we are just providing the barest summary of Porter's argument. In essence, however, it is a very strong argument for defining a goal and then shaping and integrating a value chain to assure that all the processes in the value chain work together to achieve the goal.

The importance of this approach, according to Porter, is derived from the fact

that “Positions built on systems of activities are far more sustainable than those built on individual activities.” In other words, while rivals can usually see when you have improved a specific activity, and duplicate it, they will have a much harder time figuring out exactly how you have integrated all your processes. They will have an even harder time duplicating the management discipline required to keep the integrated whole functioning smoothly.

Porter's work on strategy and value chains assured that most modern discussion of business strategy are also discussions of how value chains or processes will be organized. This, in turn, has led to a major concern with how a company aligns its

Fig. 6 The management tradition

strategic goals with its specific processes and many of the current concerns we discuss in the following pages represent efforts to address this issue.

Figure 6 pictures Rummler, Porter and some of the other major trends in the management tradition.

Balanced Scorecard

One methodology very much in the management tradition is the Balanced Scorecard methodology developed by Robert S. Kaplan and David P. Norton (1996). Kaplan and Norton began by developing an approach to performance measurement that emphasized a scorecard that considers a variety of different metrics of success. At the same time, the Scorecard methodology proposed a way of aligning departmental measures and managerial performance evaluations in hierarchies that could systemize all of the measures undertaken in an organization. Later they linked the scorecard with a model of the firm that stressed that people make processes work, that processes generated happy customers, and that happy customers generated financial results (Kaplan and Norton 2004). In other words, Kaplan and Norton have created a model that begins with strategy, links that to process and people, and then, in turn, links that to measures that determine if the operations are successfully implementing the strategy.

In its initial use, the Balanced Scorecard methodology was often used by functional organizations, but there are now a number of new approaches that tie the scorecard measures directly to value chains and business processes, and process people are increasingly finding the scorecard approach a systematic way to align process measures from specific activities to strategic goals.

Business Process Reengineering

One can argue about where the Business Process Reengineering (BPR) movement should be placed. Some would place it in the management tradition because it motivated lots of senior executives to rethink their business strategies. The emphasis in BPR on value chains certainly derives from Porter. Others would place it in the IT tradition because it emphasized using IT to redefine work processes and automate them wherever possible. It probably sits on line between the two traditions, and we'll consider in more detail under the IT tradition.