Revisiting Porter’s Generic Strategies for Competitive Environments Using System Dynamics
Porter (1998) suggests that not only do investment decisions make it hard to forecast with certainty the equilibrium of industries, but also industries may evolve following different paths at different speeds depending on these decisions. Managerial decision making signifi cantly affects the dynamics of fi rms. Management decisions to meet their strategic goals affect not only their fi rms but also the system of resources of competing fi rms, generating reactions that will infl uence their own resources in the future. The external environment is not completely exogenous but is in part created by managers and their decisions. Consequently, fi rms have to fi t into patterns of resource exchanges and competitive actions with other fi rms in the industry, forming adaptive systems embedded in feedback processes. Porter analyzed this aspect of competition through the fi ve forces framework (Porter 1998) and suggested generic strategies (cost leadership and differentiation) as a recipe for competing effectively in industries. This chapter explores the effects of business policies based on Porter’s generic strategies on the performance of the fi rm in a competitive environment. The model portrays managerial decision-making processes using the generic strategies described in Porter’s (1985) competitive strategy: cost leadership and differentiation. The model formalizes managerial decision-making processes, identifying constructs and relationships existing in each generic strategy and transforming them into equations in a process similar to the research methodology employed by Sastry (1997).