AreviewofkeystrategyideasfromMichaelPorter,withouttheFiveForces/Five
Factorscompiledfrom:“UnderstandingMichaelPorter–TheEssentialGuideto
CompetitionandStrategy”byJoanMagretta.HarvardBusinessReviewPress,copyright
2012byJoanMagretta
Agoodcompetitivestrategywillresultinsustainablysuperiorperformance.
Strategyexplainshowanorganization,facedwithcompetition,willachievesuperior
performance.Thisdefinitionisdeceptivelysimple.
ANo-WinStrategy:CompetingToBe“TheBest”.
Howoftenhaveyouheardanorganization’sleadersurgingtheirpeopletobe“the
best”?Howoftenhaveyouheardthecalltomakeyourcompanythe“bestinits
industry”?Companiesproudlyproclaimthattheyproducedthe“best”products,provide
the“best”service,andattractthe“best”talent.Thesephrasesreflectanunderlying
beliefaboutthenaturecompetitionthatfeelssointuitivelycorrectthatmostpeople,
thatis,almostneverexaminedthequestion.Ifyouwanttowin,it’sobviousthatyou
shouldbethebest.Orisit?MichaelPorterhasanameforthissyndrome.Hecallsit
competitiontobethebest.Itis,hewilltellyou,absolutelythewrongwaytothinkabout
competition.Ifyoustartoutwiththisflawedideaaboutcompetition,itwillleadyou
inevitablytoaflawedstrategy,andthatwillleadtomediocreperformance.Inthevast
majorityofbusinesses,thereissimplynosuchthingas“thebest”.Thus,amajorflawof
competitiontobethebestisthatiftheorganizationsetsouttobethebest,itsetsitself
animpossiblegoal.
Insteadofcompetingtobethebest,companiescan–andshould–competetobe
unique.Thisconceptisallaboutvalue.It’saboutuniquenessofthevalueyoucreate
andhowyoucreateit.
Isaboutthestruggleforprofits,thetug-of-waroverwhogetstocapturethevalueinthe
industrycreates.Competitiveadvantageisnotabouttrouncingrivals;it’saboutcreating
superiorvalue.Ifyouhavearealcompetitiveadvantage,itmeansthatcomparedwith
rivals,youoperateatlowercost,commandapremiumprice,orboth.Thesearetheonly
waysthatonecompanycanoutperformanother.Ifstrategyistohaveanyrealmeaning
atall,itmustlinkdirectlytoyourcompany’sfinancialperformance.Anythingshortof
thatisjusttalk.
Therefore,acompletedefinitionofcompetitiveadvantageis:Adifferenceinrelative
priceorrelativecoststhatarisebecauseofdifferencesintheactivitiesbeing
performed.
Wheneveracompanyhasachievedcompetitiveadvantage,theremustbedifferencesin
activities.Butthosedifferencescantaketwodistinctforms.Acompanycanbebetterat
performingthesameconfigurationofactivities,oritcanchooseadifferent
configurationofactivities.
Bynow,yourecognizethatthefirstapproachiscompetitiontobethebest.Porteruses
thephraseoperationaleffectivenesstorefertoacompany’sabilitytoperformsimilar
activitiesbetterthanitsrivals.Mostmanagersusetheterm“bestpractice”or
“execution”.Whatevertermyoupreferwe’retalkingaboutamultitudeofpracticesthat
allowsacompanytogetmoreoutoftheresourcesituses.Theimportantthingisnotto
confuseoperationalefficiencywithstrategy.Simplyimprovingoperationaleffectiveness
doesnotprovidearobustcompetitiveadvantagebecauserarelyare“bestpractice”
advantagessustainable.Onceacompanyestablishesanewbestpractice,itsrivaltends
tocopyquickly.Thistreadmillofimitationissometimescalledhyper-competition.
Operationalefficiencyanddisciplinedexecutionarenecessary,butnotsufficientto
createasustainablecompetitiveadvantage.
Nocompanycanaffordsloppyexecution.Inefficiencycanoverwhelmeventhemost
distinctiveandpotentiallyvaluablestrategies.Butbettingthatyoucanachieve
competitiveadvantage–asustainabledifferenceinpriceorcost–byperformingthe
sameactivitiesasyourrivalsisabetthatyouwillprobablylose.
Porter’sfivetestsofeverygoodstrategy:
1. Adistinctivevalueproposition
2. Atailoredvaluechain
3. Trade-offsdifferentfromrivals
4. Fitacrossthevaluechain
5. Continuityovertime
CreatingValue
Choosingtheparticularkindofvalueyouwillofferyourcustomersisthecoreof
competingtobeunique.Butrecallthedefinitionofcompetitiveadvantage:adifference
inrelativepriceorrelativecoststhatarisebecauseofdifferencesintheactivitiesbeing
performed.Yourvaluechainmustbespecificallytailoredtodeliveryourvalue
proposition.Avaluepropositionthatcanbeeffectivelydeliveredwithoutatailored
valuechainwillnotproducesustainablecompetitiveedge.
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Strategymeansdeliberatelychoosingadifferentsetofactivitiestodeliveraunique
mixofvalue.
Thevaluepropositionistheelementofstrategythatlooksoutwardcustomers,atthe
demand-sideofthebusiness.Thevaluechainfocusesinternallyonoperations.Strategy
isfundamentallyintegrative,bringingthedemandandsupplysidestogether.
Ifyou’retryingtodescribeastrategy,thevaluepropositionisanaturalplacetobegin.
It’sintuitivetothinkofstrategyintermsofthemixofbenefitsaimedatmeetingthe
customer’sneeds.Butthesecondtestofstrategyisoftenoverlookedbecauseitisnot
intuitiveatall.Adistinctivevaluepropositionwillnottranslateintomeaningfulstrategy
unlessthesetofactivitiestodeliveritisdifferentfromtheactivitiesperformedbyrivals.
Theessenceofstrategyandcompetitiveadvantageliesintheactivities,inchoosingto
doactivitiesdifferentlyortoperformdifferentactivitiesfromthoseofrivals.
TheThreeCoreStrategyPlatforms
Fundamentally,therearethreegenericstrategies:focus,differentiation,costleadership.
Eachofthesereflectsthemostbasiclevelofconsistencythateveryeffectivestrategy
musthave.Focusreferstothebreadthornarrownessofthecustomersandneedsa
companyservice.Differentiationallowsthecompanytocommandapremiumprice.
Costleadershipallowsyoutocompetebyofferingalowrelativeprice.Thesebroad
characterizationsofstrategytypescapturethecoredimensionsofstrategicchoice
relevantinanyindustry.
LimitsAreEssential
Choicesinthevaluepropositionthatlimitwhatthecompanywilldoareessentialto
strategybecausetheycreatetheopportunitytotailoractivitiesinawaythatbest
deliversthatkindofvalue.Tailoringispossibleonlyiftherearelimits,onlyifyouarenot
tryingtobeallthingstoallpeople.
Ifthereisoneimportanttakeawaymessage,itisthatstrategyrequireschoice.
Competitiveadvantagedependsonmakingchoicesthataredifferentfromthoseof
rivals,onmakingtrade-offs.ThisisPorter’sthirdtest.Trade-offsplaysuchacriticalrole
thatitisnoexaggerationtocallthemthestrategylinchpin.Theyholdastrategy
togetherastheycontributetocreatingandsustainingcompetitiveedge.
Acoreelementineffectivestrategyisdecidingwhattosay“no”to.
Trade-offsmakechoicesaboutwhatnottodoasimportantaschoicesofwhattodo.
Decidingwhichneedsyouwillserveandwhichproductstoofferisabsolutelykeyto
developingastrategy.Butitisjustasimportanttodecidewhichneedsyouwillnot
serve,andwhichproducts,features,orservicesyouwon’toffer.Andthencomesthe
hardpart–stickingtothosedecisions.
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ThefourthtestofstrategyissomethingthatPortercalls“fit.”
Ithastodowithhowtheactivitiesinthevaluechainrelatetooneanother.Thisaspect
ofstrategyhighlightsyetanotherpopularmisconception,thatcompetitivesuccesscan
beexplainedbyonecorecompetence,theonethingyoudoreallywell.Thefallacyhere
isthatgoodstrategiesdon’trelyonjustonething,onmakingonechoice.Nordothey
typicallyresultfromevenaseriesofchoices.Goodstrategiesdependontheconnection
amongmanythings,onmakinginterdependentchoices.
Fitmeansthatthevalueorcostofoneactivityisaffectedbythewayotheractivitiesare
performed.Thefirsttypeoffitisbasicconsistency,whereeachactivityisalignedwith
thecompany’svaluepropositionandeachcontributesincrementallytoitsdominant
themes.Whenactivitiesareinconsistent,theycanceleachotherout.
Asecondtypeoffitoccurswhenactivitiescomplementorreinforceeachother.Thisis
realsynergy,wherethevalueofeachactivityisraisedbytheother.
Thethirdtypeoffitissubstitution.Hereperformingoneactivitymakesitpossibleto
eliminateanother.
Thefifthandfinaltest:ContinuityOverTime.
Torecap:thefirsttwotests–auniquevaluepropositionandatailoredvaluechain–are
thecoreofstrategy.Trade-offs,thethirdtestistheeconomiclinchpin.Theymake
differencesinpriceandcostpossibleandsustainable.Thefourthtest,fit,isthe
amplifier,enhancingthecostandpricedifferencesthataretheessenceofcompetitive
advantage,andmakingitevenharderforrivalstocopythestrategy.Continuityisthe
enabler.Allotherelementsofstrategy–tailoring,trade-offs,fit–taketimetodevelop.
Withoutcontinuity,organizationsareunlikelytodevelopcompetitiveadvantageinthe
firstplace.
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TenPracticalImplications
1. Vyingtobethebestisanintuitivebutself-destructiveapproachtocompetition.
2. Thereisnohonorinsizeorgrowthifthoseareprofitless.Competitionisabout
profits,notmarketshare.
3. Competitiveadvantageisnotaboutbeatingrivals;it’saboutcreatingunique
valueforcustomers.Ifyouhaveacompetitiveadvantage,itwillshowuponyour
P&L.
4. Adistinctivevaluepropositionisessentialforstrategy.Butstrategyismorethan
marketing.Ifyourvaluepropositiondoesn’trequireaspecificallytailoredvalue
chaintodeliverit,itwillhavenostrategicrelevance.
5. Don’tfeelyouhaveto“delight”everypossiblecustomeroutthere.Thesignofa
goodstrategyisthatitdeliberatelymakessomecustomersunhappy.
6. Nostrategyismeaningfulunlessitmakesclearwhattheorganizationwillnotdo.
Makingtrade-offsisthelinchpinthatmakescompetitiveadvantagepossibleand
sustainable.
7. Don’toverestimateorunderestimatetheimportanceofgoodexecution.It’s
unlikelytobeasourceofsustainableadvantage,butwithoutiteventhemost
brilliantstrategywillfailtoproducesuperiorperformance.
8. Goodstrategiesdependonmanychoices,notone,andtheconnectionsamong
them.Acorecompetencealonewillrarelyproduceasustainablecompetitive
advantage.
9. Flexibilityinthefaceofuncertaintymaysoundlikeagoodidea,butitmeans
thatyourorganizationwillneverstandforanythingorbecomegoodatanything.
Toomuchchangecanbejustasdisastrousforstrategyastoolittle.
10. Committingtoastrategydoesnotrequireheroicpredictionsaboutthefuture.
Makingacommitmentactuallyimprovesyourabilitytoinnovateandadaptto
turbulenceandpreparetheorganizationforthefuture.
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