Understanding Michael Porter: An Indispensable Handbook on Strategy

Published in December 2011, Joan Magretta’s Understanding Michael Porter: The Essential Guide to Competition and Strategy, is an excellent and timely book about business strategy. It discusses the ideas and frameworks from the guru of business strategy, Michael Porter.

I include detailed notes here; but I encourage you to go out and buy the book (or at least borrow from the library). It will be worth your time

Chapter 1: Competition – The Right Mindset

  • Strategy explains how an organization, faced with competition, will achieve superior performance
  • There are generally two strategic mindsets
    • Be the Best mindset
      • Be number 1
      • Focus on market share
      • Serve best customer with best product
      • Compete by imitation
      • Zero Sum – A race that no one can usually win
    • Be Unique
      • Earn higher returns
      • Focus on profits
      • Meet diverse needs of target customers
      • Compete by innovation
      • Positive sum – multiple winners, many events
  • In general, beware of the ‘Be the Best’ Mindset
    • In the vast majority of businesses, there is simply no such thing as “the best.” Is there a best car? A best hamburger?
    • This mindset leads inevitably to a damaging zero sum competition that harms everyone (companies and customers).
    • If rivals all pursue the “one best way” to compete, they will find themselves on a collision course
  • Also beware of the related ‘Be the Biggest’ strategy
    • The importance of scale is too often exaggerated; companies only need to be big enough
  • The strategy to follow is the “Be Unique” strategy
    • This means choosing a path different from that of others

Chapter 2: The Five Forces – Competing for Profits

  • The five forces framework explains the industry’s average price and costs, and therefore the average industry profitability you are trying to beat
  • First, define the relevant industry by both its product scope and geographic scope
  • Five forces
    • Bargaining power of suppliers
    • Bargaining power of buyers
    • Threat of substitute products or services
    • Threat of new entrants
    • Rivalry among existing competitors
  • “Strategy can be viewed as building defenses against the competitive forces or finding a position in the industry where the forces are weakest.” Michael Porter
  • To do this, compete to be unique, meet different needs or serve different customers

Chapter 3: The Competitive Advantage: The Value Chain and Your P&L

  • Porter says to measure success by return on invested capital
  • Strategic choices aim to shift relative price or relative cost in a company’s favor
  • Each step in a value chain has to add some increment of value to the finished product or service
  • How to succeed with OE (operational effectiveness)
    • Activities – Perform same activities as rivals, execute better
    • Value Created – Meet same needs at lower costs
    • Advantage – Cost advantage, but hard to sustain
    • Competition- Be the BEST, compete on EXECUTION
  • How to succeed with strategy
    • Activities – Perform different activities from rivals
    • Value Created – Meet different needs and/or same needs at lower cost
    • Advantage – Sustainably higher prices and/or lower costs
    • Competition – Be UNIQUE, compete on STRATEGY
  • Competitive advantage means you have created value for customers and you are able to capture value for yourself because the positioning you have chosen in your industry effectively shelters you from the profit-eroding impact of the five forces.

Chapter 4: Creating Value – The Core

  • Value proposition
    • Which customers are you going to serve?
    • Which needs are you going to meet?
    • What relative price will provide acceptable value for customers and acceptable profitability for the company?
  • The first test of a strategy is whether your value proposition is different from your rivals. If you are trying to serve the same customers and meet the same needs and sell at the same relative prices, then you don’t have a strategy.
  • Choices in the value proposition that limit what a company will do are essential to strategy because they create the opportunity to tailor activities in a way that best delivers that kind of value
  • You cannot be all things to all customers

Chapter 5: Trade-Offs – The Linchpin

  • Straddling is the most common form of competitive imitation.
    • The straddle tries to match the benefits of a new successful position while at the same time maintaining its existing position.
    • But, strategy is an either-or realm.
    • The straddle thinks it can escape into a world of both-and; this usually turns out to be wishful thinking.
  • Clarity about what you don’t do, then, is the best way to succeed at what you do choose to do.
  • “Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do.” Michael Porter

Chapter 6: Fit – The Amplifier

  • The first kind of fit is basic consistency, where each activity is aligned.
  • A common mistake in strategy is to choose the same core competencies as everyone else in your industry.
  • By throwing multiple obstacles in the path of would-be imitators, fit lowers the odds that a strategy can be copied.

Chapter 7: Continuity – The Enabler

  • The five test of a good strategy
    • A unique value proposition
      • Are you offering distinctive value to a chosen set of customers at the right relative price?
    • A tailored value chain
      • Is the best set of activities to deliver your value proposition different from the activities performed by rivals?
    • Trade-offs different from rivals
      • Are you clear about what you won’t do so that you can deliver your kind of value most efficiently and effectively?
    • Fit across the value chain
      • Is the value of your activities enhanced by the other activities you perform?
    • Continuity over time
      • Is there enough stability in the core of your strategy to allow your organization to get good at what it does, to foster tailoring, trade-offs, and fit?
  • Continuity reinforces a company’s identity – it builds a company’s brand, its reputation, and its customer relationships
  • Great strategies are rarely, if ever, built on a particularly detailed or concrete prediction of the future.
  • Instead, they are built on having a general point of view on the future.
    • “That is what strategy is all about. It’s about a point of view about the future and then making decisions based on that. The worst thing you can do is not have a point of view, and not make decisions.” Alan Mulally (CEO of Ford)
  • When you substitute flexibility for strategy, your organization never stands for anything or becomes good at anything.
  • Strategy makes priorities clearer. Moreover, if the organization has a purpose that people understand, their willingness to change and their sense of urgency will be higher.
  • The deliberate and explicit setting of strategy is more important than ever during periods of change and uncertainty.
  • It is debilitating for an organization to feel it must serve every need that emerges or embrace every new technology that comes its way.

Epilogue: A Short List of Implications

  • Vying to be the best is an intuitive but self-destructive approach to competition.
  • There is no honor in size or growth if those are profitless. Competition is about profits, not market share.
  • Competitive advantage is about creating unique value for customers.
  • A distinctive value proposition is essential for strategy. But strategy is more than marketing.
  • Don’t feel you have to delight every possible customer out there. The sign of a good strategy is that is deliberately makes some customers unhappy.
  • No strategy is meaningful unless it makes clear what the organization will not do. Making trade-offs is the linchpin that makes competitive advantage possible and sustainable.
  • Don’t overestimate or underestimate the importance of good execution. It’s unlikely to be a source of a sustainable advantage, but without it even the most brilliant strategy will fail to produce superior performance.
  • Good strategies depend on many choices, not one, and on the connections among them. A core competence alone will rarely produce a sustainable competitive advantage.
  • Flexibility in the face of uncertainty may sound like a good idea, but it means that your organization will never stand for anything or become good at anything. Too much change can be just as disastrous for strategy as too little.
  • Committing to a strategy does not require heroic predictions about the future. Making the commitment to a strategy actually improves your ability to innovate and to adapt to turbulence.

FAQ’s: An Interview with Michael Porter

  • The worst mistake – and the most common one – is not having a strategy at all.
  • Strategy killers in the external environment
    • The push towards “competition to be the best.”
    • The capital markets’ single-minded pursuit of shareholder value
  • The pressure to grow is among the greatest threats to strategy
    • First, never copy a competitor’s strategy
    • Second, concentrate instead on deepening and extending a strategic position rather than broadening and ultimately compromising it.
    • Third, expand geographically in a focused way
  • “Sometimes, at the end of the day, the answer is that there are few opportunities to grow rapidly with your strategy and do it profitably. You’ve got a strong position in your space, and no good way to expand it significantly. Here, the huge mistake is to deny that reality and to try to turn lead into gold. Instead, you should simply make a good ROIC (return on invested capital), pay good dividends or otherwise return capital, and enjoy creating value and wealth.” Michael Porter
  • Some aspects of industry structure result from choices that industry leaders make that lead you down one path or another.
  • When you’re trying to change the industry structure, you want everyone else to follow you.
  • The fundamental goal for a business is superior long term return on investment (ROIC)
  • As done in all too many companies today, strategic planning becomes a time-consuming ritual that really doesn’t support strategic thinking at all.
  • Communicate your strategy to your customers, suppliers, the capital markets, and other stakeholders so that everyone is clear about what your strategy is.

A Porter Glossary: Key Concepts

  • Competition is the tug of war over profits that occurs not just between rivals but also between a company and its customers, its suppliers, makers of substitutes, and potential new entrants.
  • Corporate strategy is the overall strategy for a corporation that consists of diversified businesses in multiple industries; it is not the same thing as a competitive strategy. Because competitive advantage is won or lost at the level of an individual business, the goal of corporate strategy should be to enhance the competitive advantage of its multiple business units. But because the corporation sits “on top” of the business units and is the seat of power and control, this distinction is often lost in practice.

Free Strategy Consultation

Contact David Shedd today to set up a FREE business execution / strategy consultation certain to give you ideas and insights into how you can move your company forward.

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About David Shedd

David has been a President - CEO - COO of an up to $350M group of manufacturing, distribution, specialty retail and services companies, having led 22 different businesses from turnarounds to start-ups to fast growth companies.
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One Response to Understanding Michael Porter: An Indispensable Handbook on Strategy

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