Towards a Dynamic Theory of Strategy

Strategic Management Journal, Vol. 12, 95-1 I7 (I 991)

TOWARDS A DYNAMIC THEORY OF STRATEGY

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MICHAEL E. PORTER

Graduate School of Business Administration, Harvard Universitv, Boston, Massachu-

setts, U.S.A.

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This paper reviews the progress of the strategy field towards developing a truly dynamic

theory of strategy. It separates the theory of strategy into the causes of superior performance

at a given period in time (termed the cross-sectional problem) and the dynamic process by

which competitive positions are created (termed the longitudinal problem). The cross-

sectional problem is logically prior to a consideration of dynamics, and better understood.

The paper then reviews three promising streams of research that address the longitudinal

problem. These still fall short of exposing the true origins of competitive success. One

important category of these origins, the local environment in which a firm is based, is

described. Many questions remain unanswered, however, and the paper concludes with

challenges for future research.

INTRODUCTION

The reason why firms succeed or fail is perhaps

the central question in strategy. It has preoccupied

the strategy field since its inception four decades

ago. The causes of firm success or failure

encompass all the other questions that have been

raised in this collection of essays. It is inextricably

bound up in questions such as why firms differ,

how they behave, how they choose strategies,

and how they are managed. While much of the

work in the field has been implicitly domestic, it

has become increasingly apparent that any search

for the causes of firm success must confront the

reality of international competition, and the

striking differences in the performance of firms

in a given industry based in different nations.

Yet, the question of why firms succeed or fail

raises a still broader question. Any effort to

understand success must rest on an underlying

Key words:

competitiveness

Strategy formulation, dynamic theories,

theory of the firm and an associated theory of

strategy. While there has been considerable

progress in developing frameworks that explain

differing competitive success at any given point

in time, our understanding of the dynamic

processes by which firms perceive and ultimately

attain superior market positions is far less

developed. Worse yet, some recent research has

tended to fragment or dichotomize the important

parts of the problem rather than integrate them,

as I will discuss later.

My purpose in this essay is to sketch the

outlines of a dynamic theory of strategy. Drawing

on recent research, some parts of the outline can

be filled in. Many unanswered questions remain,

however, and I will try to highlight some of the

most important of them.

As a starting point for building a dynamic

theory of strategy, we must step back from

specific hypotheses or models and look broadly

at the literature in both strategy and economics.

I will begin by describing the traditional rationale

for company success that emerged in the early

literature on strategy. This reflected an orien-

0143-2095/9 1/100095-23$11 .SO

0 1991 by John Wiley & Sons, Ltd.

96 M. E. Porter

tation of the strategy field that has differed

in important respects from that which has

characterized most research in economics, argu-

ably the discipline with the most obvious connec-

tion to strategy. The strategy field's traditional

answer to why firms succeed or fail was also

based on a set of largely implicit, but crucial

assumptions about the nature of firms and the

environment in which they operate.

Although these assumptions grew out of a deep

understanding of practice, they raise profound

challenges for a theory of strategy. I will outline

some of the most important challenges and the

trade-offs they raise in both theory and empirical

testing. Taking these challenges as a starting

point, I will then describe my own answers