Interbrand Choice, Strategy, and Bilateral Market Power
His doctoral work, published by Harvard University Press
Summary
This is Michael Porter's doctoral work in industrial organisation economics, published in 1976, and it precedes the strategy books that made his name. The subject is how the way consumers choose among brands determines the structure of both the manufacturing industry and the retail channel that sells its products.
Porter's central distinction is between convenience goods, which consumers buy with little search because the cost of a wrong choice is low, and shopping goods, where consumers gather information and compare before purchasing. He argues that this difference determines where the persuasive effort must be applied. For convenience goods the manufacturer must reach the consumer directly through advertising, because the retailer has no role in the decision, and the manufacturer therefore accumulates bargaining power against the channel. For shopping goods the retailer supplies information and influences the choice, so the retailer captures bargaining power and the manufacturer's advertising matters less.
The empirical work tests this against industry data on advertising intensity, margins and concentration in manufacturing and retailing. The book is an academic monograph and reads like one, with the econometrics of its period. Its importance is as the source of ideas Porter later developed into the five forces, particularly the analysis of buyer power and of how industry structure is determined by underlying economic conditions rather than by managerial choice. For a working operator the direct application is to channel strategy: the framework predicts which party will capture margin in a given product category and why.
Key takeaways 6
- How consumers search before buying determines whether manufacturers or retailers hold bargaining power in a product category.
- Convenience goods manufacturers must advertise to end consumers because the retailer contributes nothing to the purchase decision.
- Shopping goods manufacturers depend on retailers to supply product information, which transfers bargaining power to the channel.
- Advertising intensity in an industry is a consequence of consumer search behaviour rather than a free strategic choice.
- Concentration in retailing and concentration in manufacturing are jointly determined, so neither can be analysed alone.
- Manufacturer margins in a category are predictable from the search characteristics of the product rather than from firm-level strategy.
Who should read it
Operators making channel and marketing spend decisions who want the structural theory of why some categories concentrate margin upstream and others downstream.
About Michael E. Porter
Bishop William Lawrence University Professor Emeritus, Harvard Business School; founder, Institute for Strategy and Competitiveness
Competitive Strategy and the five-forces framework are the primary source for industry analysis, and Competitive Advantage supplied the value-chain vocabulary the field still uses.
Harvard Business School, Institute for Strategy and Competitiveness
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