Business Level Strategy
Papers included in this summary
1. Porter (1991) - Towards a dynamic theory of strategy
2. Kemp (2024) - Competitive advantage through artificial intelligence: Toward a theory of situated AI
3. Boyd & Bresser (2008) - Performance implications of delayed competitive responses: Evidence from the U.S.
retail industry
4. Nadkarni, Chen & Chen (2016) - The clock is ticking! Executive temporal depth, industry velocity, and
competitive aggressiveness
5. Sirmon, Hitt, Arregle & Campbell (2010) - The dynamic interplay of capability strengths and weaknesses:
Investigating the bases of temporary competitive advantage
6. Schilke (2014) - On the contingent value of dynamic capabilities for competitive advantage: The nonlinear
moderating effect of environmental dynamism
7. Krakowski, Luger & Raisch (2023) - Artificial intelligence and the changing sources of competitive advantage
8. Cassiman & Veugelers (2006) - In search of complementarity in innovation strategy: Internal R&D; and
external knowledge acquisition
9. Klingebiel & Joseph (2016) - Entry timing and innovation strategy in feature phones
10. Gao, Liu & Yang (2025) - Artificial intelligence and innovation capability: A dynamic capabilities perspective
11. Flammer (2013) - Corporate social responsibility and shareholder reaction: The environmental awareness of
investors
12. Hawn & Ioannou (2016) - Mind the gap: The interplay between external and internal actions in the case of
corporate social responsibility
13. Song, Hou, Ouyang & Hao (2026) - AI washing: Strategic disclosure and backlash
14. Hatch & Dyer (2004) - Human capital and learning as a source of sustainable competitive advantage
15. Riley, Michael & Mahoney (2017) - Human capital matters: Market valuation of firm investments in training
and the role of complementary assets
,Business Level Strategy
Paper 1: Porter, M. E. (1991). Towards a Dynamic Theory of Strategy
Key concepts
cross-sectional problem; longitudinal problem; relative competitive position; initial
conditions
Commitment under uncertainty; Game-theoretic models of competitive interaction; The
resource-based view; home environment
Factor conditions; Demand conditions; Related and supporting industries; Firm strategy,
structure, and rivalry
Central question and purpose
Porter starts from the most fundamental question in strategic management: why do some firms succeed
while others fail? He argues that strategy research has become much better at explaining differences in
performance at a particular point in time than at explaining how those positions came into existence and
how they change.
This creates a distinction between the cross-sectional problem and the longitudinal problem. The
cross-sectional problem asks why one firm has superior performance now. The longitudinal problem
asks how firms create, lose, renew, or transform competitive positions over time.
Porter regards the cross-sectional problem as logically prior: before explaining the origins of superior
positions, a theory must be clear about what constitutes a superior position and why it produces
superior performance.
Porter's objective is therefore not to replace existing strategy frameworks but to connect them into the
outline of a genuinely dynamic theory. Such a theory must link industry structure, competitive position,
firm activities, resources, managerial choices, initial conditions, and the local environment.
It also has to explain feedback: firms respond to their environments, but their actions can alter
industries, capabilities, and competitive conditions as well.
The cross-sectional explanation of superior performance
Porter's static starting point contains two major determinants of profitability. First, the attractiveness of
the industry determines the overall profit potential available to participants. Industry attractiveness is
explained by the familiar competitive forces: rivalry among existing competitors, threat of entry, threat of
substitutes, bargaining power of buyers, and bargaining power of suppliers.
Second, firms differ in their relative competitive position within the same industry. A firm can
outperform because it has a sustainable cost advantage, a sustainable differentiation advantage, or a
focused position that exploits one of these forms of advantage in a particular segment.
The concept of competitive advantage becomes meaningful only when it is connected to the activities
the firm performs. A firm does not possess "low cost" or "differentiation" in the abstract.
These outcomes emerge from the configuration of activities in its value chain and from the drivers that
make those activities cheaper, more distinctive, or better coordinated than rivals' activities.
Scope matters as well: the segments, geographic markets, degree of vertical integration, and related
activities chosen by the firm change both the value of activities and their linkages.
Porter therefore places activities between broad strategic positions and underlying resources.
Resources and activities should not be treated as rival explanations. Resources enable activities;
repeated activities also create resources and capabilities. What matters is the chain of causality that
connects environmental conditions and firm choices to activity systems and eventually to performance.
Why a dynamic theory is difficult
1
,A dynamic theory must explain where the drivers of advantage come from. If the explanation merely
says that successful firms have valuable resources, the argument risks becoming circular: resources
are called valuable because they produce success, and success is then explained by the possession of
valuable resources.
Similarly, explaining performance only through industry structure leaves unanswered why firms in the
same industry react differently, innovate at different rates, or create different positions.
Porter identifies two broad sources of dynamic variation: initial conditions and managerial choices.
Initial conditions include inherited capabilities, historical investments, location, technological trajectories,
organizational arrangements, and other starting positions. Managerial choices include investments,
commitments, positioning decisions, changes to the activity system, and responses to competitors. The
categories interact.
What appears to be an initial condition today is often the accumulated outcome of earlier choices, while
today's choices become tomorrow's initial conditions. This creates path dependence without eliminating
managerial agency.
Three streams of research on strategic dynamics
Porter reviews three research streams that contribute to the longitudinal problem but, in his view, do
not yet provide a complete dynamic theory.
Commitment under uncertainty. Strategic commitments are difficult or costly to reverse. Capacity
investments, technological choices, distribution networks, brand-building, and other commitments
shape the firm's future opportunity set. Uncertainty makes these decisions important because
managers cannot know all future states when they commit. This literature clarifies why early choices
can create persistent differences, but it often studies isolated commitments rather than the evolution
of a complete competitive position.
Game-theoretic models of competitive interaction. Game theory provides a language for
analyzing sequence, retaliation, signaling, deterrence, entry, and other interdependent choices. It
makes clear that the value of a move depends on rivals' responses. However, highly stylized
assumptions can make it difficult to capture the complexity of real firms, multiple activities, long
histories, and heterogeneous organizational capabilities. The models are useful building blocks
rather than a full theory of strategic development.
The resource-based view. The RBV emphasizes heterogeneous, valuable, difficult-to-imitate
resources and the path-dependent processes through which they accumulate. Porter sees this as an
important advance because it shifts attention to firm-specific histories and isolating mechanisms. Yet
he warns against treating resources as the ultimate unit of explanation. Resources are often
produced through activities and prior choices; resources that were once strengths can become
rigidities; and their value depends on the competitive environment in which they are deployed.
The local environment as an origin of competitive advantage
A major part of Porter's dynamic argument concerns the firm's home environment. Firms do not
develop capabilities in isolation. The local environment influences the information they receive, the
pressures they face, the specialized resources available to them, and the intensity with which they are
pushed to improve.
Porter summarizes this environment through four mutually reinforcing dimensions, often described as
the national or regional "diamond."
Factor conditions refer not simply to abundant generic inputs, but especially to sophisticated and
specialized factors such as advanced skills, research institutions, infrastructure, and technical
knowledge that are relevant to particular industries.
Demand conditions matter when local customers are sophisticated, demanding, or unusually early
in expressing needs that later become important elsewhere. Such buyers pressure firms to improve
and provide early signals of future demand.
Related and supporting industries provide specialized suppliers, complementary technologies,
knowledge flows, and opportunities for coordination. Geographic proximity can accelerate
information exchange and innovation.
2
, Firm strategy, structure, and rivalry concern the way firms are created, organized, managed, and
challenged. Intense local rivalry is particularly important because it creates continuing pressure to
upgrade rather than live on an existing advantage.
Government can influence these conditions, but Porter sees it primarily as a catalyst and shaper rather
than the direct creator of competitive advantage. The four dimensions reinforce one another and often
create geographic clusters.
Proximity matters because innovation frequently depends on rich, rapid, repeated interaction rather than
on access to generic information alone.
Dynamic process: innovation, upgrading, and feedback
Competitive advantage is therefore not a permanent possession. Firms must continuously improve their
activities, develop more sophisticated sources of advantage, and innovate.
A low-order advantage based on cheap generic inputs is more vulnerable than an advantage based on
specialized knowledge, complex activity linkages, reputation, accumulated learning, or a system that
rivals find hard to reproduce. The dynamic challenge is to keep moving toward more defensible
positions before competitors erode existing ones.
Porter also stresses feedback. A successful firm may influence supplier capabilities, labor markets,
customer expectations, and rival behavior. An expanding cluster can deepen specialized factor pools
and attract complementary firms. Conversely, success may create complacency or rigidity. A dynamic
theory must therefore allow the firm and environment to co-evolve.
Empirical status and main conclusions
This is a conceptual article, not an empirical hypothesis test. Porter synthesizes strategy and
economics research and uses observed patterns of international and industry competition to specify
what a dynamic theory must explain. Accordingly, there are no sample, regression coefficients, or
direct causal estimates.
The principal conclusion is theoretical: current competitive position is not enough. Strategy must
explain the historical processes that create activities and resources, the external context that shapes
those processes, and the managerial choices that sustain or transform them.
Managerial and strategic implications
Managers should avoid viewing competitive advantage as a static asset that can simply be
protected. The relevant question is whether the firm's activity system and capabilities are improving
faster than those of competitors. Strategic consistency matters, because individual activities
produce more value when they reinforce a coherent position.
At the same time, consistency should not become immobility: firms must upgrade the sources of
advantage as technology, customer needs, and rivalry change.
Managers should also examine the firm's ecosystem. Sophisticated customers, demanding
suppliers, specialized labor, research institutions, and aggressive local competitors can be strategic
resources because they accelerate learning. An apparently comfortable environment may be less
valuable over the long run than an environment that constantly exposes weaknesses.
Strategic analysis should therefore include not only "what resources do we own?" but also "what
processes continually improve those resources, and what external conditions force us to learn?"
Finally, the article cautions against attributing success to a single cause. Superior performance
typically emerges from a causal chain: environment and history affect choices; choices configure
activities; activities create or deploy resources; resources and linkages produce cost or
differentiation advantages; and those advantages are valuable only within a particular competitive
structure.
Limitations and unresolved questions highlighted by Porter
Because the paper sketches an agenda rather than offering a finished model, Porter explicitly leaves
major questions open. A dynamic theory must find an appropriate level of abstraction: frameworks
broad enough to describe complex firms can become difficult to test, while formal models can
become unrealistically narrow.
3
Papers included in this summary
1. Porter (1991) - Towards a dynamic theory of strategy
2. Kemp (2024) - Competitive advantage through artificial intelligence: Toward a theory of situated AI
3. Boyd & Bresser (2008) - Performance implications of delayed competitive responses: Evidence from the U.S.
retail industry
4. Nadkarni, Chen & Chen (2016) - The clock is ticking! Executive temporal depth, industry velocity, and
competitive aggressiveness
5. Sirmon, Hitt, Arregle & Campbell (2010) - The dynamic interplay of capability strengths and weaknesses:
Investigating the bases of temporary competitive advantage
6. Schilke (2014) - On the contingent value of dynamic capabilities for competitive advantage: The nonlinear
moderating effect of environmental dynamism
7. Krakowski, Luger & Raisch (2023) - Artificial intelligence and the changing sources of competitive advantage
8. Cassiman & Veugelers (2006) - In search of complementarity in innovation strategy: Internal R&D; and
external knowledge acquisition
9. Klingebiel & Joseph (2016) - Entry timing and innovation strategy in feature phones
10. Gao, Liu & Yang (2025) - Artificial intelligence and innovation capability: A dynamic capabilities perspective
11. Flammer (2013) - Corporate social responsibility and shareholder reaction: The environmental awareness of
investors
12. Hawn & Ioannou (2016) - Mind the gap: The interplay between external and internal actions in the case of
corporate social responsibility
13. Song, Hou, Ouyang & Hao (2026) - AI washing: Strategic disclosure and backlash
14. Hatch & Dyer (2004) - Human capital and learning as a source of sustainable competitive advantage
15. Riley, Michael & Mahoney (2017) - Human capital matters: Market valuation of firm investments in training
and the role of complementary assets
,Business Level Strategy
Paper 1: Porter, M. E. (1991). Towards a Dynamic Theory of Strategy
Key concepts
cross-sectional problem; longitudinal problem; relative competitive position; initial
conditions
Commitment under uncertainty; Game-theoretic models of competitive interaction; The
resource-based view; home environment
Factor conditions; Demand conditions; Related and supporting industries; Firm strategy,
structure, and rivalry
Central question and purpose
Porter starts from the most fundamental question in strategic management: why do some firms succeed
while others fail? He argues that strategy research has become much better at explaining differences in
performance at a particular point in time than at explaining how those positions came into existence and
how they change.
This creates a distinction between the cross-sectional problem and the longitudinal problem. The
cross-sectional problem asks why one firm has superior performance now. The longitudinal problem
asks how firms create, lose, renew, or transform competitive positions over time.
Porter regards the cross-sectional problem as logically prior: before explaining the origins of superior
positions, a theory must be clear about what constitutes a superior position and why it produces
superior performance.
Porter's objective is therefore not to replace existing strategy frameworks but to connect them into the
outline of a genuinely dynamic theory. Such a theory must link industry structure, competitive position,
firm activities, resources, managerial choices, initial conditions, and the local environment.
It also has to explain feedback: firms respond to their environments, but their actions can alter
industries, capabilities, and competitive conditions as well.
The cross-sectional explanation of superior performance
Porter's static starting point contains two major determinants of profitability. First, the attractiveness of
the industry determines the overall profit potential available to participants. Industry attractiveness is
explained by the familiar competitive forces: rivalry among existing competitors, threat of entry, threat of
substitutes, bargaining power of buyers, and bargaining power of suppliers.
Second, firms differ in their relative competitive position within the same industry. A firm can
outperform because it has a sustainable cost advantage, a sustainable differentiation advantage, or a
focused position that exploits one of these forms of advantage in a particular segment.
The concept of competitive advantage becomes meaningful only when it is connected to the activities
the firm performs. A firm does not possess "low cost" or "differentiation" in the abstract.
These outcomes emerge from the configuration of activities in its value chain and from the drivers that
make those activities cheaper, more distinctive, or better coordinated than rivals' activities.
Scope matters as well: the segments, geographic markets, degree of vertical integration, and related
activities chosen by the firm change both the value of activities and their linkages.
Porter therefore places activities between broad strategic positions and underlying resources.
Resources and activities should not be treated as rival explanations. Resources enable activities;
repeated activities also create resources and capabilities. What matters is the chain of causality that
connects environmental conditions and firm choices to activity systems and eventually to performance.
Why a dynamic theory is difficult
1
,A dynamic theory must explain where the drivers of advantage come from. If the explanation merely
says that successful firms have valuable resources, the argument risks becoming circular: resources
are called valuable because they produce success, and success is then explained by the possession of
valuable resources.
Similarly, explaining performance only through industry structure leaves unanswered why firms in the
same industry react differently, innovate at different rates, or create different positions.
Porter identifies two broad sources of dynamic variation: initial conditions and managerial choices.
Initial conditions include inherited capabilities, historical investments, location, technological trajectories,
organizational arrangements, and other starting positions. Managerial choices include investments,
commitments, positioning decisions, changes to the activity system, and responses to competitors. The
categories interact.
What appears to be an initial condition today is often the accumulated outcome of earlier choices, while
today's choices become tomorrow's initial conditions. This creates path dependence without eliminating
managerial agency.
Three streams of research on strategic dynamics
Porter reviews three research streams that contribute to the longitudinal problem but, in his view, do
not yet provide a complete dynamic theory.
Commitment under uncertainty. Strategic commitments are difficult or costly to reverse. Capacity
investments, technological choices, distribution networks, brand-building, and other commitments
shape the firm's future opportunity set. Uncertainty makes these decisions important because
managers cannot know all future states when they commit. This literature clarifies why early choices
can create persistent differences, but it often studies isolated commitments rather than the evolution
of a complete competitive position.
Game-theoretic models of competitive interaction. Game theory provides a language for
analyzing sequence, retaliation, signaling, deterrence, entry, and other interdependent choices. It
makes clear that the value of a move depends on rivals' responses. However, highly stylized
assumptions can make it difficult to capture the complexity of real firms, multiple activities, long
histories, and heterogeneous organizational capabilities. The models are useful building blocks
rather than a full theory of strategic development.
The resource-based view. The RBV emphasizes heterogeneous, valuable, difficult-to-imitate
resources and the path-dependent processes through which they accumulate. Porter sees this as an
important advance because it shifts attention to firm-specific histories and isolating mechanisms. Yet
he warns against treating resources as the ultimate unit of explanation. Resources are often
produced through activities and prior choices; resources that were once strengths can become
rigidities; and their value depends on the competitive environment in which they are deployed.
The local environment as an origin of competitive advantage
A major part of Porter's dynamic argument concerns the firm's home environment. Firms do not
develop capabilities in isolation. The local environment influences the information they receive, the
pressures they face, the specialized resources available to them, and the intensity with which they are
pushed to improve.
Porter summarizes this environment through four mutually reinforcing dimensions, often described as
the national or regional "diamond."
Factor conditions refer not simply to abundant generic inputs, but especially to sophisticated and
specialized factors such as advanced skills, research institutions, infrastructure, and technical
knowledge that are relevant to particular industries.
Demand conditions matter when local customers are sophisticated, demanding, or unusually early
in expressing needs that later become important elsewhere. Such buyers pressure firms to improve
and provide early signals of future demand.
Related and supporting industries provide specialized suppliers, complementary technologies,
knowledge flows, and opportunities for coordination. Geographic proximity can accelerate
information exchange and innovation.
2
, Firm strategy, structure, and rivalry concern the way firms are created, organized, managed, and
challenged. Intense local rivalry is particularly important because it creates continuing pressure to
upgrade rather than live on an existing advantage.
Government can influence these conditions, but Porter sees it primarily as a catalyst and shaper rather
than the direct creator of competitive advantage. The four dimensions reinforce one another and often
create geographic clusters.
Proximity matters because innovation frequently depends on rich, rapid, repeated interaction rather than
on access to generic information alone.
Dynamic process: innovation, upgrading, and feedback
Competitive advantage is therefore not a permanent possession. Firms must continuously improve their
activities, develop more sophisticated sources of advantage, and innovate.
A low-order advantage based on cheap generic inputs is more vulnerable than an advantage based on
specialized knowledge, complex activity linkages, reputation, accumulated learning, or a system that
rivals find hard to reproduce. The dynamic challenge is to keep moving toward more defensible
positions before competitors erode existing ones.
Porter also stresses feedback. A successful firm may influence supplier capabilities, labor markets,
customer expectations, and rival behavior. An expanding cluster can deepen specialized factor pools
and attract complementary firms. Conversely, success may create complacency or rigidity. A dynamic
theory must therefore allow the firm and environment to co-evolve.
Empirical status and main conclusions
This is a conceptual article, not an empirical hypothesis test. Porter synthesizes strategy and
economics research and uses observed patterns of international and industry competition to specify
what a dynamic theory must explain. Accordingly, there are no sample, regression coefficients, or
direct causal estimates.
The principal conclusion is theoretical: current competitive position is not enough. Strategy must
explain the historical processes that create activities and resources, the external context that shapes
those processes, and the managerial choices that sustain or transform them.
Managerial and strategic implications
Managers should avoid viewing competitive advantage as a static asset that can simply be
protected. The relevant question is whether the firm's activity system and capabilities are improving
faster than those of competitors. Strategic consistency matters, because individual activities
produce more value when they reinforce a coherent position.
At the same time, consistency should not become immobility: firms must upgrade the sources of
advantage as technology, customer needs, and rivalry change.
Managers should also examine the firm's ecosystem. Sophisticated customers, demanding
suppliers, specialized labor, research institutions, and aggressive local competitors can be strategic
resources because they accelerate learning. An apparently comfortable environment may be less
valuable over the long run than an environment that constantly exposes weaknesses.
Strategic analysis should therefore include not only "what resources do we own?" but also "what
processes continually improve those resources, and what external conditions force us to learn?"
Finally, the article cautions against attributing success to a single cause. Superior performance
typically emerges from a causal chain: environment and history affect choices; choices configure
activities; activities create or deploy resources; resources and linkages produce cost or
differentiation advantages; and those advantages are valuable only within a particular competitive
structure.
Limitations and unresolved questions highlighted by Porter
Because the paper sketches an agenda rather than offering a finished model, Porter explicitly leaves
major questions open. A dynamic theory must find an appropriate level of abstraction: frameworks
broad enough to describe complex firms can become difficult to test, while formal models can
become unrealistically narrow.
3
