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2/5/2005
Michael Porter, reviewed by Victor Niederhoffer

If there's a Bible in business strategy, it's the concept of "Competitive Strategy" as pioneered by Harvard Business School dynamo Michael Porter in his book as well as his follow-ups on "Competitive Advantage" and "Competition Between Nations" and follow-up articles like "What do we know About Variance in Accounting Profitability" with Anita McGahan in Management Science (2002).

“Competitive Strategy” has been read by millions of business students; it has been reprinted 50 times and translated into 20 languages; Bill Gates is a fan. It contains the basic language that businesses and consultants use to make their strategic decisions and consider their strategic advantages and disadvantages. It pioneers such concepts as the five forces of business: Supplier Power, Barriers to Entry, Threat of Substitutes, Buying Power and Degree of Rivalry. It contains the three generic competitive strategies: cost leadership, focus and product differentiation.

The follow up book introduces the concept of value chain, which again is at the hub of all business decision making these days. Numerous 2-by-2 and 3-by-3 classifications used by consultants such as Bain and McKinsey, and companies such as GE like the growth share matrix (the star and the cash cow) and the Company Position Industry Attractiveness screen (build, hold or harvest), which are noted as specific but defective short cuts to a very limited application of Porter's framework.

Thus, after reading this legendary classic and the follow-up books and articles, and some of the 15,000 references to Michael Porter’s consulting firm, including his specific analysis of the defects of the health-care industry (competition is zero sum rather than win-win) one gets a good understanding of the framework for business strategy at large firms

Since I haven’t kept up with the practice of competitive business dynamics, I found the book most provocative, the same way one does with such legendary tomes in our field such as the work of Ben Graham, the Founder.

And yet, I have never read such worthless palaver in my life. Not one economic principle is used to understand the myriad anecdotes presented, nor any understanding or appreciation of the knowledge and rich theoretical framework emanating from such fields as biology, evolution or geology. The book contains no predictions, nor any method of classifying companies into the various categories with any degree of stability.

In those fields that I am expert on, like mergers and acquisitions, the author is completely naive and his recommendations are particularly detrimental. For example, he suggests that it is good to find company owners that are willing to sell for non-price factors such as prestige or feeling that the acquiring company can do the job much better than the owner so you can get a better price. But anyone in the business like I have been for 40 years can tell you that no such companies exist, and that such expressions by sellers are sales talk designed to amuse the business development functionaries, the intermediaries and the company's own management.

The technical articles that Porter has written are riddled with descriptive details and don’t take account of any alternative random no-information models. For example, they conclude that the business that a company is in explains much more of the variation of profits among firms than the parent. But how much extra information does this provide than considering each company as unique, and how does this vary over time?

Porter should be considered a vapid marketing expert without any technical knowledge of economics, statistics or any other discipline that would have left the reader with some foundation for making useful decisions about business strategy. And nothing he writes about will give you any insight about which stocks to buy, or industries to enter, or plants, or markets to expand or contract in, except that like 6 sigma, when you hear someone's a devoted follower of his principles, you'll know that he tends to lead a company with all hat and no beef.