Session 1.2 – Porter and the Industrial
Organization View (Porter's early work)
Theories of Strategy · MSc BA Strategy, UvA · Summary for the exam of 12 October 2026
Sources: Course description, Study Guide, Reading Guide, Notes on lectures (Lecture 2), Lecture 2
slides, prerecorded decks Overview of Porter's work, Bain-type IO, Porter – Positioning school, Analysis
of Porter's early work; Ghemawat (1999, pp. 21–35); Porter (1979); Porter (1981); cases Case meeting
1.2, Trucking industry, Antitrust. Rent definitions also use Peteraf (1993) and the Conner table (session
1.1).
1. Where 1.2 fits in the course
The course's question: how can we explain differences in performance among firms?
(Lecture 2, slide 8).
Principle 1 (session 1.1): when all assumptions of perfect competition hold, every firm earns
zero economic profit and there is no competitive advantage.
Corollary: any deviation from perfect competition is a possible source of competitive
advantage.
Session 1.2 looks at the first deviation: imperfections in product markets that give firms
market power (some control over price).
Principle 2: Firms can earn an economic profit if they are in a position of market power (i.e. if
they have (some) control over price). (Analysis of Porter's early work, slide 16; Study Guide
table)
Managerial implication: establish a position of bargaining power vis-à-vis buyers and/or
suppliers.
1.2 opens Block 2, the positional views. These theories use neoclassical equilibrium logic. They
explain performance by positions at one point in time, treat the firm as a black box and a
unitary agent, and assume rational profit-maximisers (Reading Guide). Later sessions relax
these assumptions one at a time.
Diagram: the layers of theory (Lecture 2, slide 17)
STRATEGIC MANAGEMENT: Positioning School Resource-Based School
▲ ▲ ▲ ▲
ECONOMIC THEORIES: Bain-type I/O Chicago Ricardian Schumpeterian
\ | /
Neoclassical Economics
The bold arrow runs Bain-type IO → Positioning School: Porter's main contribution was translating
Bain-type IO into managerial frameworks (Overview of Porter's work).
ToS Session 1.2 · page
, Conner table (1991): the two rows that matter for 1.2 (Lecture 2, slide 15)
School View of the Central Source of Role of management
firm concept performance
differences
Bain-type Output S-C-P (industry Market power Develop advantageous
IO restrainer structure) market position
Chicago Efficiency Information costs Efficiency Look for efficiencies in
school seeker production and distribution
2. The four market types
Bain-type IO slide 4; Lecture 2 slide 29; Ghemawat pp. 24–25
Perfect Monopolistic Oligopoly Monopoly
competition competition
Number of Many, small Many Few One
sellers
Product Homogeneous Differentiated Homogeneous or Unique, no close
differentiated substitutes
Control over None (price Some (own brand) Considerable; mutual High (price setter)
price taker) dependence
Entry Free Relatively easy Barriers Blocked
Economic Zero Possible through Possible through barriers Highest, by
profit differentiation and coordination restricting output
Theoretical Neoclassical Chamberlin & Cournot (1838); oligopoly Cournot (1838)
origin (Marshall) Robinson (1933) and game theory
Ghemawat: each model relaxes an assumption of supply-demand analysis. Cournot relaxed large
numbers; Chamberlin and Robinson relaxed homogeneity. Neither captured oligopolistic
competition, which is where real business strategy happens.
Correction for your notes: the Lecture 4 notes describe monopolistic competition as "many
sellers, less buyers". The defining feature is many sellers with differentiated products.
3. Bain-type Industrial Organization and the S-C-P paradigm
Origin (Ghemawat pp. 24–25; Porter 1981): Harvard economists Edward Mason and Joe Bain,
1950s–60s.
Diagram: S-C-P (Porter 1981, Figure 2; Bain-type IO slide 8)
Industry STRUCTURE ──► CONDUCT (strategy) ──► PERFORMANCE
Structure: the relatively stable economic and technical dimensions of an industry that form
the context of competition. Key elements are entry barriers, the number and size distribution
of firms (concentration), product differentiation and demand elasticity.
Conduct: the firm's choices on key decision variables (price, advertising, capacity, quality).
These are the economic dimensions of strategy.
ToS Session 1.2 · page
Organization View (Porter's early work)
Theories of Strategy · MSc BA Strategy, UvA · Summary for the exam of 12 October 2026
Sources: Course description, Study Guide, Reading Guide, Notes on lectures (Lecture 2), Lecture 2
slides, prerecorded decks Overview of Porter's work, Bain-type IO, Porter – Positioning school, Analysis
of Porter's early work; Ghemawat (1999, pp. 21–35); Porter (1979); Porter (1981); cases Case meeting
1.2, Trucking industry, Antitrust. Rent definitions also use Peteraf (1993) and the Conner table (session
1.1).
1. Where 1.2 fits in the course
The course's question: how can we explain differences in performance among firms?
(Lecture 2, slide 8).
Principle 1 (session 1.1): when all assumptions of perfect competition hold, every firm earns
zero economic profit and there is no competitive advantage.
Corollary: any deviation from perfect competition is a possible source of competitive
advantage.
Session 1.2 looks at the first deviation: imperfections in product markets that give firms
market power (some control over price).
Principle 2: Firms can earn an economic profit if they are in a position of market power (i.e. if
they have (some) control over price). (Analysis of Porter's early work, slide 16; Study Guide
table)
Managerial implication: establish a position of bargaining power vis-à-vis buyers and/or
suppliers.
1.2 opens Block 2, the positional views. These theories use neoclassical equilibrium logic. They
explain performance by positions at one point in time, treat the firm as a black box and a
unitary agent, and assume rational profit-maximisers (Reading Guide). Later sessions relax
these assumptions one at a time.
Diagram: the layers of theory (Lecture 2, slide 17)
STRATEGIC MANAGEMENT: Positioning School Resource-Based School
▲ ▲ ▲ ▲
ECONOMIC THEORIES: Bain-type I/O Chicago Ricardian Schumpeterian
\ | /
Neoclassical Economics
The bold arrow runs Bain-type IO → Positioning School: Porter's main contribution was translating
Bain-type IO into managerial frameworks (Overview of Porter's work).
ToS Session 1.2 · page
, Conner table (1991): the two rows that matter for 1.2 (Lecture 2, slide 15)
School View of the Central Source of Role of management
firm concept performance
differences
Bain-type Output S-C-P (industry Market power Develop advantageous
IO restrainer structure) market position
Chicago Efficiency Information costs Efficiency Look for efficiencies in
school seeker production and distribution
2. The four market types
Bain-type IO slide 4; Lecture 2 slide 29; Ghemawat pp. 24–25
Perfect Monopolistic Oligopoly Monopoly
competition competition
Number of Many, small Many Few One
sellers
Product Homogeneous Differentiated Homogeneous or Unique, no close
differentiated substitutes
Control over None (price Some (own brand) Considerable; mutual High (price setter)
price taker) dependence
Entry Free Relatively easy Barriers Blocked
Economic Zero Possible through Possible through barriers Highest, by
profit differentiation and coordination restricting output
Theoretical Neoclassical Chamberlin & Cournot (1838); oligopoly Cournot (1838)
origin (Marshall) Robinson (1933) and game theory
Ghemawat: each model relaxes an assumption of supply-demand analysis. Cournot relaxed large
numbers; Chamberlin and Robinson relaxed homogeneity. Neither captured oligopolistic
competition, which is where real business strategy happens.
Correction for your notes: the Lecture 4 notes describe monopolistic competition as "many
sellers, less buyers". The defining feature is many sellers with differentiated products.
3. Bain-type Industrial Organization and the S-C-P paradigm
Origin (Ghemawat pp. 24–25; Porter 1981): Harvard economists Edward Mason and Joe Bain,
1950s–60s.
Diagram: S-C-P (Porter 1981, Figure 2; Bain-type IO slide 8)
Industry STRUCTURE ──► CONDUCT (strategy) ──► PERFORMANCE
Structure: the relatively stable economic and technical dimensions of an industry that form
the context of competition. Key elements are entry barriers, the number and size distribution
of firms (concentration), product differentiation and demand elasticity.
Conduct: the firm's choices on key decision variables (price, advertising, capacity, quality).
These are the economic dimensions of strategy.
ToS Session 1.2 · page
