An Interview with Michael Porter Author(s): Michael Porter, Nicholas Argyres and Anita M.

McGahan Reviewed work(s): Source: The Academy of Management Executive (1993-2005), Vol. 16, No. 2, Theme: Achieving Competitive Advantage (May, 2002), pp. 43-52 Published by: Academy of Management Stable URL: http://www.jstor.org/stable/4165839 . Accessed: 05/02/2013 09:58
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Academy of Management

Executive, 2002, Vol. 16, No. 2

An

interview with Michael Porter

Interviewed by Nicholas Argyres and Anita M. McGahan Executive Overview

Michael E. Porter is the Bishop William Lawrence University Professor at the Harvard Business School. A university professorship is the highest professional recognition that can be given to a Harvard faculty member. Professor Porter is a leading authority on competitive strategy and the competitiveness and economic development of nations, states, and regions. He is the author of 16 books and over 85 articles, and has served as an advisor on competitive strategy to many leading companies. Professor Porter has also served as a counselor to governments around the world on issues of economic development and national competitiveness. He was elected a Fellow of the Academy of Management in 1988 and the Royal Swedish Academy of Engineering Sciences in 1991. He also received the Charles Coolidge Parlin Award from the American Marketing Association in 1991. Professor Porter has been awarded honorary doctorates by eight universities around the world. His national honors include the Creu de St. Jordi (Cross of St. George) from Catalonia (Spain) and the Ruben Dario Order of Merit (the highest civilian honor awarded by the government of Nicaragua). In 2001, Harvard Business School and Harvard University jointly created the Institute for Strategy and Competitiveness, led by Professor Porter, to further his work. Professor Porter maintains a long-time interest in the esthetics and business of music and art, having worked on the problems of strategy with arts organizations and aspiring musicians. Professor Porter and his two daughters, Ilana (14) and Sonia (12), reside in Brookline, Massachusetts.
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What motivated you to write Competitive Strategy? I entered the MBA program at Harvard Business School in 1969 and studied business policy, as it was then called, with the School's all-time greats. Then in 1971, I entered the Ph.D. program in business economics here at Harvard and took a course in industrial organization from Richard Caves across the river. It was a surreal experience. In both business policy and industrial organization, we were talking about industries. There were lots of common issues but no real connection between the two fields. And so right then and there, it became clear that there was an opportunity to bring industrial organization thinking into the study of strategy, and vice versa. After joining HBS as an assistant professor in the business policy group, I actually started trying to create the synthesis immediately. It turned out to be harder than I thought because of gaps in the industrial organization framework. Industrial or43

ganization was using the structure-conduct-performance framework, which was dominated by considerations of the number and size distribution of firms, and, following Joe Bain's work, entry barriers. But that was pretty much it. It quickly became clear from looking at many case studies that Bain's list of barriers to entry was incomplete. It turned out to require a lot of additional work to actually extend the industrial organization approach to encompass the broader range of considerations that occur in practice. Two examples are switching costs and barriers to exit, notions that I developed in the late 1970s with Richard Caves. On the Business School side of the river, ceteris paribus assumptions don't work. Managers must consider everything. I concluded that we needed frameworks rather than models. We also needed a more disciplined way to think about strategy. We needed a more rigorous approach, a systematic way to look at industries and where firms

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Michael Porter stood in their industries. The prevailing SWOT model of strengths/weaknesses/opportunities/ threats was based on the idea that every case is different and that the relevant considerations are company-specific. As I was struggling to teach using the SWOT framework at HBS, I set out to add more rigor. My initial research was in the industrial organization tradition, including a series of statistical papers and a scholarly book that grew out of my dissertation. I tried to extend the literature and started to anticipate some of the notions of strategy and positioning that I developed later. There came a time, though, when I decided that I was going to have to stop pursuing the trajectory I was on and take a big leap. There was little hope that a complete framework would emerge from one incremental article after another, in which statistical work tested one effect after another. I decided that I would seek a complete framework, drawing not only on statistical tests but on the larger number of case studies that I had by then assembled, and that was when Competitive Strategy was born. The five forces [competitive rivalry, bargaining power of suppliers, bargaining

power of buyers, threat of new entrants, and threat of substitutes] emerged as an encompassing way to look at an industry. To develop the five forces, I drew on I.O. but also had to go beyond it. In addition to switching costs and barriers to exit, there were many other areas. There was research on monopsony [a buyer's monopoly; only one customer for a company's product], for example, but no real I.O. work about relative bargaining power with buyers. The concept of substitution was well known in economics, but it really had never been applied to looking at industry and industry profitability. Developing the five-forces framework was a long process. And then at the last minute, just months before this massive project was over, I decided I needed to say something about positioning. Most of that book is about industry structure, both static and dynamic. At the eleventh hour, I tried to get at the question of how to think about positioning in a way that was fundamental and connected to competitive advantage. At the time, the existing thought in the management literature focused on strategic alternatives and covered notions such as vertical integration, diversification, defenders and attackers. I decided that fundamental to any theory of positioning had to be superior profitability. This in turn required competitive advantage, and fundamental to any thinking about competitive advantage was scope, or the breadth of the company's strategic target. That led to the generic strategies [low-cost leadership, product differentiation, and market specialization]. The chapter on generic strategies was the last chapter to be written. Again, it involved uncomfortable territory. Business School colleagues were saying, "Too abstract" and "We can't generalize," while the economists were saying, "Where are the statistical tests? What is the model?" It was a very uncomfortable leap. Didn't you write most of the book while you were an assistant professor? Yes, but also in the first year or two of my associate professorship. I was promoted to associate professor based on my mainstream I.O. research. Right after my promotion, however, our dean got me out of the required business policy course and into teaching in an executive program, where I was the only strategy professor. The real core of the book got finished when I was no longer teaching in business policy and didn't have to fight any battles about what to teach. I had actually written a note on the structural analysis of industries as part of my review for associate professor. I'll never forget a senior professor telling

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me that my note on five-forces analysis was "a good experiment that failed." You must have had some very discouraging moments. Yes, there were discouraging moments. But I was actually getting a lot of positive feedback on the economic side, with offers from other schools. But here at the Business School, I was feeling a bit discouraged because my whole approach was a huge departure from the tradition. battle In retrospect, I began a pedagogical around the School that's largely been won. I think I was one of the first here to teach a course with serious conceptual notes and a lot of reading. The only reason I was able to get away with it in the MBA program was because I taught an elective course, ICA (Industry and Competitive Analysis), that was overwhelmed with students. There's something fascinating here, because you hear Nobel laureate economists like Gary Becker telling the same kinds of stories. His early work on the family was heavily criticized or ignored initially. George Akerlof had trouble getting his famous lemons paper' published. These scholars in a sense were distant from the market, whereas you could always point to the crowd lining up to take your course. That's what protected me. The students were signing on. And then I started to get a lot of traction in the practitioner community.

confirming that you can go a long way to understanding an industry in a textured way using fiveforces analysis. The term "design school" is typical of much work in management in that it creates a false dichotomization. We know that companies are constantly learning. Yes, some companies do stumble into strategies. My work aims not to be descriptive but normative. What principles explain successful strategies? I believe strongly that managers can apply these principles prospectively, and that most do. The essence of most good strategies is the need to make many choices that are all consistentchoices about production, service, design, and so on. Companies cannot randomly make a lot of choices that all turn out to be consistent. It's statistically impossible. That means companies need to grasp at least a part of the whole. As we study the histories of successful companies, we see that someone or some group developed insight into how a number of choices fit together, and that was the ignition point for the strategy. There's a bit of emergent strategy in every company. But unless at some point the company can see the design, see how the pieces fit, and make the interdependent choices consistent, the company is not going to be successful. You've alluded to the difference between frameworks and models. What made these frameworks so helpful in the outside world? The HBS research tradition saw the enterprise as an incredibly complex entity. Thousands of things mattered. Every situation was unique, because it consisted of different individuals, different markets, different products. Therefore, the way to study management was through in-depth cases and field research. One needed to go out in the field, do clinical research, and develop an administrative point of view. The hope was to draw some broad generalizations out of a set of the cases over time. I subscribe to much of this perspective but thought we could go further. But the real insight comes from a kind of maturity and judgment that develops over ... ... studying lots of cases. That's the HBS tradition. The economics tradition is completely different. In economics, you model a phenomenon. That model is informed by the phenomenon but does not try to replicate the phenomenon or capture it fully. The best economic models abstract the essence of the phenomenon and represent it

I started to get a lot of traction in the practitioner community.

Your approach has been termed a design school of strategy and criticized for emphasizing that a firm can plan and deliberate its approach to superior profitability. These critics emphasize an alternative in which a firm crafts strategy opportunistically as the environment changes. They might ask, for example, "How can you do a five-forces analysis if you can't figure out who your rivals are?" There are emerging industries, and I wrote a chapter about them in Competitive Strategy. In practice, five-forces analysis is very useful in 999 out of a thousand cases. There's a large body of evidence from corporate practice and strategy consulting

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and then derive interesting immathematically, plications. Michael Spence, with whom I worked closely, was extraordinarily good at this sort of work. The other attribute of economics research is statistical testing of hypotheses generated from models. The trouble with this whole approach is that it doesn't capture the full richness of competition, the multi-dimensionality of competition, the number of variables that are simultaneously optimized, and the multiple feedback loops that are pervasive. So I opted neither for the case-study approach nor for the modeling/large-scale statistical testing approach. My main body of work is what I call frameworks. A framework tries to capture the full richness of a phenomenon with the most limited number of dimensions.

More quantitative?" We moved to a statistical phase in which I was a participant, in my early work. But the result was a narrow, stylized view of industries. A bias developed against textured case evidence. In some sense, my whole academic life was fundamentally affected by case studies, because I encountered business policy cases first, before I encountered industrial organization. It was out of an in-depth exposure to cases, informed by my economics training and search for generalization, that I came up with my particular way of thinking about strategy. Is the purpose of the five-forces analysis to help an executive figure out which industries a firm should be in? It's one of several purposes. Five-forces analysis is done from the perspective of an incumbent. When a company is an outsider, it must add to its analysis the cost of overcoming entry barriers. The ability to do so can only be understood from a textured understanding of the company's unique situation and whether it can come up with a distinctive positioning for competing in the industry. If you had the chance to rewrite the Five Forces Model today, would you add a sixth force? The advantage I had was that I didn't come to the conclusion that there were five forces until I'd looked at hundreds of industries. The specifics of competition change every day, but I don't believe that the fundamentals of competition change very much if at all. There is no real fundamental conceptual difference between the competition we see today and the competition we saw 50 years ago. We may see more rapid information flow, and certain kinds of advantages may erode more rapidly. However, the basic character of competition is pretty much the same. There have been two nominees for the sixth force. One is government. After much further work using and teaching the framework, I have reaffirmed my original conclusion that government is not a sixth force because there is no monotonic relationship between the strength and influence of government and the profitability of industry. You can't say that "government is high, industry profitability is low," or "government is low, industry profitability is high." It all depends on exactly what government does. Also, there are many different parts of government, each with its own distinct impacts. And how do you assess the consequence of what government does? Well, you look at how it aTffects the five forces.

My main body of work is what I call frameworks. A framework tries to capture the full richness of a phenomenon with the most limited number of dimensions.
The artistry of model building is in deciding what to extract and how to manipulate it. The artistry of case writing is the sense of the clinician, the ability to tease out and understand the essence of what's really going on. In framework building, the artistry is in providing the smallest number of core elements that still capture the variation and the dimensionality of competition. And these dimensions then have to be intuitively grounded. That is, if you present a practitioner with the five forces, it must make sense in the context of his or her industry. This kind of work is somewhat unsettling. Operating in that middle ground is uncomfortable because the folks on the economics side harp at you: "How did you derive those particular five forces? Why are these particular variables believed to be the most fundamental drivers of that one particular force such as barriers to entry?" On the case study side, people try come up with exceptions, contesting any attempt at generalization. Case study evidence is sometimes not fully recognized in economics. Yes. Actually, the early work in industrial organization was heavily based on case studies. Long books were written on individual industries. Out of that textured view came a framework: structure-conductperformance. Then the field appropriately asked, "How can we be more systematic? More rigorous?

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The other, more recent, candidate for a sixth force involves organizations whose products and services are complementary to the primary organization's products and services. Again, there is no monotonic relationship between the extent of complements and profitability. Sometimes having many complements is consistent with high industry profitability, sometimes with low profitability. It has to do with how complements affect the five forces. Adam Brandenburger's work has appropriately put more weight on the relationships between complements and the overall size of an industry. Clearly, complements have much to do with the size of the pie, but their role in the division of the pie is dependent on other factors.

In an interview some months ago, Robert Waterman contrasted your view of positioning with a skills-based view. To use an analogy from ice hockey, he suggests that what we should be doing in strategy is helping companies "skate to where the puck will be," rather than "to where the puck is now." Would you comment on that? I don't think there is any dichotomy between the positioning view and the skills-based view. The positioning view says that in order to have a competitive advantage, the company has to do something unique. It must deliver some different kind of value to some different group of customers. To do so, a company must be good at its way of competing. It needs to develop a unique set of skills that other organizations don't have. step The value chain helps clarify this-one deeper into positioning is a set of unique activities, which depend (in part) on unique skills. Skills aren't valuable per se; they are only valuable in the context of a particular positioning that makes them valuable. This point applies to the resourcebased view of competition as well. The value of a particular resource is only manifested if you have a particular strategy which realizes that value. As for the notion of skating to where the puck will be, I would make both an empirical and a theoretical observation. The empirical observation is that successful companies don't have to define it. skate to where the puck will be-they They have a strong continuity of strategy, rather than jumping from one form of differentiation to Even another, or from cost to differentiation. high-tech firms like Sun Microsystems, Dell, and Intel have distinctive strategies with continuity in the essential positioning adopted. The change and innovation occur not in shifting the strategy but in how to deliver on it. From a theoretical point of view, innovation isn't good per se. Innovation is only good if it produces a distinctive position in the marketplace.

Some researchers have raised questions about generic strategies-are whether positioning-the as relevant as speed, knowledge, and dynamic capabilities in today's environment. Lower cost and differentiation are directly connected with profitability. Some of the new ideas about speed, knowledge, and dynamic capabilities are interesting, but they need to be connected to profitability. Speed isn't good for its own sake, for example. It depends on what the speed allows you to do that generates lower cost or differentiation.

Speed isn't good for its own sake, for example. It depends on what the speed allows you to do that generates lower cost or differentiation.
Strategy can be seen as a set of relationships to profitability. Profitability is revenue minus cost. You can decompose that into an industry part and a positioning part. Industry profitability depends on the five forces. On positioning, Competitive Strategy laid out the essence. If profitability is the firm's foremost goal, positioning must start with price and cost. I didn't really work out the nuances of operational effectiveness versus positioning in Competitive Strategy. I got to it later in my article "What Is Strategy?" and it will be the subject of my next book. It is interesting that we lost sight of profitability as the goal and substituted shareholder value measured by stock price. This has not only destroyed many companies but gave credence to a number of management ideas that are not robust.

There's a view out there that markets are developing so quickly that firms should develop resources even when it's impossible to see how they'll be commercialized. For example, we have companies today developing optic, genetic, and without a clear idea about the nano-technologies, products that will develop. Should companies develop latent capabilities that can be deployed quickly? As a matter of empirical observation, there is little evidence that such investments pay off very often. It makes sense for a company to be quite aggres-

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sive in looking throughout its value chain for underlying technologies that can significantly influence either individual activities or the product itself. The really good companies are out there is often what CEOs do. They are scanning-this visiting customers, suppliers, and universities looking for new things that are promising enough to develop. But if there's an interesting new technology, and management cannot draw a clear connection with the business, it's unlikely to become a productive use of corporate resources. Think of Xerox PARC. It made a great contribution to society but had a modest impact on Xerox's competitive advantage.

Gary Hamel has promoted the idea that companies should pursue causes, rather than products. Companies should have mission statements that motivate people with a cause. Should companies emphasize causes rather than individual businesses? Does every corporate goal have to relate to profitability? A cause has to be directly connected to a business purpose and competitive advantage to be useful for strategy. The cause must say something about the value that the company's product delivers. Sunrise Medical, the Vanguard Group of funds, and The Body Shop might be examples. By articulating the value in cause-like terms, one often gets internal benefits such as motivation of employees and external benefits such as free publicity. But in these examples, the cause ties directly to a distinctive strategy. A lot of mission statements are completely useless. They are statements of broad principles that might create a warm glow in the company, but they don't guide competitive success.

If there's an interesting new technology, and management cannot draw a clear connection with the business, it's unlikely to become a productive use of corporate resources.
But some kinds of technical innovation are not at the activity level. They blow the whole system out of the water. Jet engines over propeller engines. Steam ships over sailing ships. Yes, but those kinds of transformational technologies are very rare- on the order of every three or four decades. The Internet is Exhibit A; it was not particularly transformational. There has been a tendency to dramatically overstate the disruptive impact of technologies.

Some researchers have suggested that in the new economy, companies should share knowledge, open themselves up, be collaborative, and engage in a lot of partnerships and alliances. Do you want to comment on that? I'm pretty suspicious of that view. First of all, much current management thinking is not about distinctive positions; it's about being big. The allure of HP's merger with Compaq is in size. Compaq was successful when it had a unique position. And HP was reasonably successful when it had a unique position. The real question here has to do with how the merged company will be unique. The attention to partnering and alliances has a lot to do with the desire to be big, cover a bigger territory, and offer a broader product range. Perhaps there's also a less noble dimension to it. Many partnerships and alliances are basically hedging. There's little evidence that I'm aware of showing that extensive partnering and alliances are associated with superior performance. And I can think of lots of case studies where partnering has been directly associated with poor performance. Alliances and partnerships are not strategy. There's a prior set of choices that have to be made about what advantages a company is going to offer to what set of customers, and with what unique configuration of activities. Partnering and alliances are somewhere down the logical chain, contingent on the strategy. There is a tendency in management to not see the logical chain but to latch on to a fad in the guise of straftegy.

Stepping back, is there anything at all that you would change about Competitive Strategy if you were writing it today? The main example that has emerged over the last decade or so is demand-side economies of scale, sometimes called network externalities. These should be separated out in the list of barriers to entry. The original formulation included economies of scale, which could be interpreted to cover network externalities. But I was thinking primarily about production economies as opposed to demand-side economies. Demand-side economies, then, are truly an advancement to the framework. And I'm sure that there are other things that could be added, but this is the main one. Having said this, network externalities are not a barrier unless firms can keep them proprietary. There are only a limited number of cases where demand-side economies of scale are highly significant.

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But sometimes partnerships are informationgathering vehicles. Right. And that can be good. But again, I believe that any theory of strategy, and any understanding of competition, has to address the fundamental question of profit. It all starts with profit. Unless an alliance is connected in some fairly clear way to competitive advantage and profit, it has a very high likelihood of being a distraction. There is a tendency in the management field to jump on trends which, one after the other, crash and burn. The Internet was a great example of that.

There is a tendency in the management field to jump on trends which, one after the other, crash and burn.
Another best-selling business book of the 1980s was Peters and Waterman's In Search of Excellence. Do you have a point of view on that book? It was a very important book for a couple of reasons. It instilled a sense of hope and excitement about excellence. This occurred at a time when the U.S. economy was shaky, when we were facing competition from Japan, when there were doubts about whether the U.S. could compete. It was a motivational book for the time. Its greatest contribution was to say, "Let's strive to really be excellent. Let's believe that we can be excellent." What the book didn't have was a framework. It didn't have a set of tools which would allow you to decide how you could be excellent. The principles in the book were a list of "good things to do," but well short of a set of tools for understanding the competitive environment or for developing a unique strategy. We would like to ask you about the relationship between government and business. The question arises from the following tension. Government's objective in setting a context is often to restrain firms from making profit at the expense of consumer welfare, whereas the main objective of firms is clearly profit maximization. Are government and industry at odds? Is it the role of government to restrain business? I strongly believe that antitrust enforcement is vital to both firms and society. In a new paper, I argue that the principal objective of antitrust has been short-term consumer welfare, measured by low price-cost margins. Just look at the merger guidelines, which emphasize price effects, quan-

tity effects, etc. And a secondary objective of antitrust enforcement has been efficiency. If there was an efficiency justification, it was possible to overturn a finding based on market power measured by margins. Somewhere at the bottom of the pecking order is dynamic efficiency, or innovation. What I argue is that such a hierarchy of goals is backward and creates a zero-sum game between government and firms. I argue that the goals need to be inverted-the most important goal for society is innovation, next technical efficiency, and at the very bottom current profitability. If we had the proper ranking of goals for society, we would see a much greater harmony between strategy thinking and antitrust thinking. Strategy thinking says, "Differentiate yourself. Make yourself unique. Come up with your own distinctive positioning in the marketplace." Antitrust thinking has traditionally defined as ideal a world where there were a bunch of competitors imitating each other and cutting price. I argue that instead of lowering price-cost margins, the principal goal of antitrust analysis should be productivity growth. Productivity growth creates a win-win opportunity for both consumers and firms. Antitrust should not seek to achieve competitive markets, in classical economics terms. In such markets, products are homogeneous and consumers have no choice-there's little innovation going on. There is little incentive for the firms to innovate. The kind of rivalry we want as society is what might be called strategic rivalry, where there is market segmentation, positioning and choice, and the search for different cost functions. I argue that instead of using HHI [the HirschmanHerfindahl Index] to examine the health of competition, you should actually use the five forces, which is a much more textured view. There is no statistical link between seller competition and profitability, much less innovation. The more I learn, the more I think that antitrust is actually in the interest of companies because it and mergers with works against dominance competitors that actually hurt companies in the long run.

What you say suggests an irony in antitrust enforcement. By not forcing firms to show how a merger will enhance competitive advantage, antitrust policies may actually be encouraging firms to pursue inefficient mergers. Yes-inefficient mergers that actually do lead to monopoly that perpetuates the inefficiency.

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You've written about environmental policy, urban revitalization, and education policy. Are there two or three policy areas in particular that you feel should receive more emphasis in public debate now, with regard to regulating corporate activity? I think there are some fundamental policy issues surrounding accounting and performance measurement. I also think that the whole question of executive compensation and stock options is very important. There's a nexus of issues including financial market imperfections, agency problems, executive competition, and the proper goals for corporate strategy. As you know, I believe that the fundamental goal of strategy should be profitability, not the stock price. Too many executives are focused on raising the stock prices of their companies in destructive ways for economic value. There are fundamental public policy issues about the system we have created, over the last five years especially.

Too many executives are focused on raising the stock prices of their companies in destructive ways for economic value.
A second fundamental public-policy issue for the U.S. is inequality, and particularly economically distressed citizens and communities. There have been decades of policy failure because we've tried to address inequality as a social problem, rather than as an economic problem-the lack of opportunity to participate in the market system. Seeing inequality in economic terms has very different policy implications. We would also love to have your thoughts on what you think about the state of strategy as a field. Are you encouraged by the field's direction over the past 10 years? Optimistic about what's happening to the field of strategy? What kind of work do you find particularly exciting? I must say I find the field a cacophony of discordant voices. It's not that the research is conducted poorly; I find a lot of useful insights in several strands that have emerged in the field over the last decade. But the emphasis has not been to integrate. For example, the resource-based view just cannot stand on its own. Yet there are elements of real insight there. If you could hook the resourcebased view to the value chain, to strategic choices, a-nd ultimately to profit, then you could

build a more robust role for resource/capability thinking. Some other views of strategy are hypotheses with no evidence. Two of my papers with Anita McGahan show that industry effects are incredibly persistent. So why do some argue that industries are changing so quickly, that analyzing industries isn't relevant? Clayton Christensen's work on disruptive technologies is another example. If one reads much management literature, one would think that disruptive technologies are coming at us every day. I think that disruptive technologies that are successful in displacing established leaders are extremely rare, that in their success they displace established leaders. Even in semiconductors or computers, Dell, Intel, and Sun have been the leaders for 20 years or more. The focus of my body of work has been fundamentally integrative. It has sought to encompass many different dimensions and put them into an internally consistent framework. Surely the framework can be enhanced with some of the new insights, but without integrating with my work, most of the "new ideas" have not stood the test of time. What are the promising new areas that could be usefully integrated to produce the next pathbreaking book? You talked a little bit about the resource-based view and the value chain as one possible area. Yes, connecting elements of the resource-based view to the value chain, strategic positioning, and profitability. Let me focus on another area related to industry structure, since that's the fundamental topic of Competitive Strategy. Underneath the industry structure is a whole set of individual influences like switching costs, which cut across the five forces. One important area for research deals with how those influences emerge. How does industry structure evolve? So there's room for work on industry evolution that builds on the five forces? Yes, that explores the dynamics of why and how the forces change. I should add that the fiveforces framework has been criticized as static. I completely reject that. The framework is time invariant-it applies at any point in time. It helps reveal whether changes are important. Half the chapters in Competitive Strategy were about change. But there is room for more work to understand

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the intricacies of how the elements of industry structure emerge. How are the elements influenced? We need more research to understand the feedback loops between firm behavior and industry structure. Another important priority is to study how new positions emerge and how activity systems are built.

Hollywood might be another example where status matters. That's true, as well as in the music industry. Let me react to these questions broadly. These issues are not fundamental to the field of strategy with the because they do not deal specifically set of choices a company makes. Scholars tend to become fascinated by interesting tangents that can be modeled. In strategy, it is important to focus on generalizations and not on special cases, although they may be extremely important.

So you think there's something more than path dependence and historical accident. There are some systematic relationships there. Oh, absolutely. I think you could find some systematic insights in this territory. The value chain is based on the idea that companies perform multiple activities. I once took a stab at defining the components of an activity as human resources, physical assets (that are supporting the human resources), associated financial assets (e.g., inventory), information, and a technology governing how the activity inputs are converted into outputs. At this level there is a connection with the resource-based view of the firm. A host of issues surround how these various elements are created and how activities are linked, among others. My next strategy book will deal with some of these issues. It starts with the basic distinction between operational effectiveness and positioning, and goes from there.

Most venture-backed successful.

firms are not

As you know, the field has turned toward incorporating insights from different disciplinary bases, particularly from sociology and economics. For example, some scholars are investigating population dynamics by studying firm survival over long periods that span centuries. Another example has to do with status. Some scholars are looking at how firm success relates to connections with important social actors. So if I'm a start-up firm, it's really important that I'm funded by the most prestigious venture capital firm. There might be signaling effects there, but they talk about it in terms of status. Again, these are empirical issues. Status effects might apply to some subset of firms and industries in which venture capital is fundamental. As you know, venture capital is very small in terms of the whole economy and in terms of the number of firms it affects. And such effects only affect a slice of time and certain benefits. Most venture-backed firms arre not successful.

Clay Christensen's work embodies one story about industry evolution: the new technology initially undershoots the needs of the most sophisticated buyers, and so established companies have difficulty understanding and adapting to it. That is a perfectly legitimate story. But you could imagine an equally plausible opposite story. That is, a new technology overshoots. My view is that we ought to be framing our theory of strategy at a high level of generality. We need a contingent framework that talks about why some industries are different from others. This should be a test that distinguishes truly important research in competitive strategy from just good research. Important research deals with the enduring principles that connect the details of a specific case with outcomes. One of the facets of your reaction to the question about status is fascinating. It seems that your view is that competition almost always leads to outcomes that wash out initial differences like status. Given the chance to be at the starting line, almost everybody will actualize their capability better than if they are propped up or supported in a way that doesn't evoke from them some desire for personal success. Your reaction to this question on status was, "Well, it exists, and it's out there, but there are many other more interesting issues that drive how well any competitor performs." Yes, exactly. Status is important but on the margin. The fundamentally interesting questions about corporate performance have to do with the competitive environment and the strategic choices a firm makes about products and a[ctivities atnd so on.

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52

Academy of Management

Executive

May

Let us test you a little on this front. The idea is that if we just get the right venture capitalist, everything falls into place. If we just get the Harvard professor on our scientific advisory board, then all these good things come. The ball starts rolling, and positioning becomes almost secondary. Well, of course, this is not true empirically, in either casework or in statistical research. Path dependence is not simple. If we get at the roots of successful strategies, you ask questions like: Why did a given company get a given insight? Well, that usually has to do with something, with the history, the industry a person came out of, early clients, and ways of experiencing a problem. In that sense there is a path by which insights emerge and choices get made. Having said that, there's nothing regular and repeated about it. I think there's a lot to be learned from studying strategic histories, but I don't think they're going to tell us that there's a repeated phenomenon. Great insights don't come from a formula. Entrepreneurial insight is much more about developing a hazy understanding of an opportunity. It's about being in a better position to perceive the opportunity than someone else because of where you are and who you are. And then success comes from whether you can translate that insight into something that works in the market. Maybe status plays a part, but it's only one part of a much more com-

plicated story. Ironically, we are going to have to get back to case studies.

Ironically, we are going to have to get back to case studies.

Strategy is a little like economic development, my other major field. It's a field where everything matters. Choices matter, the leader matters, the culture matters, the values matter, random events matter, and so on. Strategy is inherently an integrative subject that has to allow for complexity. What I tried to bring to the field in Competitive Strategy, and in my later work, was the notion that there are certain economic fundamentals on which everything else must rest. If you can master the fundamental economic grounding, that really helps you come up with the right strategy. With such a framework, skills, culture, causes, and so on can be integrated. Many thanks. We explored some of the real fundamentals. Thanks to both of you. Endnote
' A reference to George Akerlof's 1970 paper "The Market for Lemons," which showed the importance of buyers and sellers having different amounts of information about the product being bought or sold by examining the market for used cars.

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Nicholas Argyres is an associate professor in the Strategy & Policy Department at the Boston University School of Management. He studies the relationships between the strategies and intemal organization of firms; the determinants of organizational boundaries; governance of university technology transfer; and He organizational politics. currently serves on the editorial board of the Academy of Management Journal. Contact: nargyres@bu.edu.

Anita M. McGahan, professor of strategy & policy at the Boston University School of Management, is also a fellow at the Harvard Institute on StratShe egy and Competitiveness. is the author of over 50 articles and case studies on competitive advantage, industry evolution, and company financial performance. She earned an MBA and a Ph.D. in business economics from Harvard. Contact: amcgahan@bu.edu.

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