Porter’s Productivity Frontier
In an industry at any given time, there is a theoretical boundary of performance for which the operational state of the art is attained. This boundary is called the productivity frontier, which Michael Porter defines as the “sum of all existing best practices at any given time”. One way of thinking of this: if a company were operating as effectively as possible, it could only do so on the outermost boundary of the productivity frontier. Conversely, any company not at the frontier, could improve by addressing the practices it was deficient in and thereby move closer to the frontier. In Porter’s formulation, the frontier is constantly moving “outwards”; this is his way of visualizing gradual improvement as new technologies, practices, tools, etc., are disseminated throughout an economy and industry.
The significance of the productivity frontier in Porter’s view is that while firms must strive to reach its frontiers at all times, it is not sufficient if they wish to obtain a sustainable strategic advantage. Strategic advantage is attained when firms can combine unique activities into their overall operations. In this respect, companies compete on two very different planes: first, to keep up with their industry peers as they gradually improve their operations by adopting best practices. Secondly, some of the best firms compete by identifying and investing in unique activities that others cannot duplicate and that are thereby not on the industry’s productivity frontier.
Porter’s formulation is compelling and interesting. It mirrors other “frontiers”, such as the Efficient Frontier in Portfolio Theory or Operations Management. It’s a conceptualization that describes the idea that by just using resources available to anyone else, one cannot build a long term advantage since competitors can simply copy the practices. It’s a powerful and useful warning. And it applies at the level of individuals, firms and even nations. He admonishes that most firms are focused on trying to move to the edge of the frontier and mistake this activity for building a sustainable advantage or, worse, a sound strategy.
However, it is a simplification. The reason firms obsess over trying to attain the frontier is that most of them are organized around operational efficiency, not strategic realignment. And, even what appear to be unique activities at one time can become commonplace later. In the long run, what is really challenging is for firms to see when their unique activities are eroding and to determine how best to resuscitate them.