When an organization demonstrates profits that are above average for the industry, this organization is believed to have some form of competitive advantage over the competition. Michael Porter theorized that there were two basic forms of competitive advantage, that deriving from a cost advantage and a differentiation advantage. A cost advantage occurs when an organization is able to provide a product or service with similar benefits, but at a lower cost than their competitors. A differentiation advantage occurs when an organization’s product or service provides benefits beyond those of their competitors. In either case, the organization provides a superior level of value to its customers. These positional advantages are created by using resources and capabilities to either provide a differentiated offering, or an offering with
However, not all strategic management authorities feel Porter has not provided a good understanding of the idea of competitive advantage. a lower cost structure (Porter, 2006). This theory is based on the concept of industry clusters, industries that gain a performance advantage due to co-location. Clearly, although Porter"tms ideas appear, at first, to be sound theories, when applied to the real world are found lacking. First, is the worry that such policies will lead to over-specialization in an economy. In direct opposition to classical comparative advantage theories, Porter theorized that nations could create factor endowments, beyond those, which they inherit, such as: natural resources, labor, and land. There are four primary concerns with policies promoting Porter"tms industry clusters. In addition, industry clusters are more applicable to small, specialized firms, as opposed to large, multi-national corporations that dominate the current economy and undermine the trust that is needed for an effective cluster. Porter"tms competitive advantage further fails as it ignores the innovation and value that is created by an organization"tms employees, and therefore does not create a true, lasting and non-easily imitable advantage. It is characterized by an environmental determinism, and a linear Cartesian attitude towards complex problems that assumes that a business is merely the sum of its parts, as opposed to a complex, uncertain and ever-changing relationship amongst its parts. Instead, he theorized that a country could create things such as a skilled workforce or a strong technology base, and used a diamond to represent the four components that affect a national comparative advantage (Sledge, 2005). This, along with a positivistic approach in the use of case studies of relatively limited realities, has resulted in generalizations and 'universal rules' which have simply served to legitimize three general trends inherent to the dominant financial capitalism: domination by large corporations towards situations of monopolies or oligopolies, the concentration of capital and an interdiction of any movement towards true participatory management (2005, p. As Aktouf, Chenoufi, and Holford note, Porter"tms framework does provide for a basic, systematic approach to strategic management, but fails to provide any scientific rigor.