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May 30 - May 30, 2021
“The essence of strategy,” Porter often says, “is choosing what not to do.”
This book focuses on competition and strategy,
Therefore, the way to study management was through in-depth cases and field research
Economic models abstract the essence of the phenomenon and represent it mathematically.”
The most common error of all is that competitive success comes from “being the best.” This mind-set is highly intuitive. It is also self-destructive, leading to a zero-sum race to the bottom.
In this way, competitive advantage is about how your value chain will be different and your P&L better than the industry average.
Quantifying forces you to be precise.
The key to competitive success—for businesses and nonprofits alike—lies in an organization’s ability to create unique value. Porter’s prescription: aim to be unique, not best. Creating value, not beating rivals, is at the heart of competition.
“a good competitive strategy that will result in sustainably superior performance.”
Strategy explains how an organization, faced with competition, will achieve superior performance.
In the vast majority of businesses, there is simply no such thing as “the best.”
In most industries, there are many different customers with different needs. The best hotel for one customer is not the best for another. The best sales encounter for one customer is not the best for another. There is no best art museum, no one best way to promote environmental sustainability.
The best always depends on what you are trying to accomplish. Thus, the first flaw of competition to be the best is that if an organization sets out to be the best, it sets itself an impossible goal.
If rivals all pursue the “one best way” to compete, they will find themselves on a collision course.
Instead of competing to be the best, companies can—and should—compete to be unique.
A better analogy than war or sports might be the performing arts. There can be many good singers or actors—each outstanding and successful in a distinctive way.
Competing to be the best feeds on imitation. Competing to be unique thrives on innovation.
Why are some companies more profitable than others? That’s the big question we’ll be working on. The answer has two parts. First, companies benefit from (or are hurt by) the structure of their industry. Second, a company’s relative position within its industry can account for even more of the difference.
The real point of competition is not to beat your rivals. It’s not about winning a sale. The point is to earn profits.
Second, industry structure determines profitability—not,
Here’s the general rule: the more powerful the force, the more pressure it will put on prices or costs or both, and therefore the less attractive the industry will be to its incumbents.
A movie camera, for example, is a highly differentiated piece of equipment. Its price is small relative to the other costs of production, but the performance of the equipment has a big impact on the success of the movie. Here quality trumps price.
The five forces framework applies in all industries for the simple reason that it encompasses relationships fundamental to all commerce.
Managers often mistakenly assume that a high-growth industry will be an attractive one. But growth is no guarantee that the industry will be profitable. For example, growth might put suppliers in the driver’s seat, or, combined with low entry barriers, growth might attract new rivals.
The untested assumption that a fast-growing industry is a “good” industry, Porter warns, often leads to bad strategy decisions.
Strategy,” Porter writes, “can be viewed as building defenses against the competitive forces or finding a position in the industry where the forces are weakest.”
In any industry, there is always change. The better your grasp of industry structure, the more likely it is you will spot and exploit new strategic opportunities or moves that could reshape industry structure in your favor. The challenge is to discern the changes that matter. Change that is truly strategic affects the five forces.
Industry structure, then, determines the performance any company can expect just by being an “average” player in its industry. Competitive advantage is about superior performance.
The financial measure that best captures this idea is return on invested capital (ROIC). ROIC weighs the profits a company generates versus all the funds invested in it, operating expenses and capital.
Just to keep our terminology straight, for Porter strategy always means “competitive strategy” within a business.
The big idea here is this: strategy choices aim to shift relative price or relative cost in a company’s favor. Ultimately, of course, it’s the spread between the two that matters: any strategy must result in a favorable relationship between relative price and relative cost. A distinct strategy will produce its own unique structure.
We now have a concise, concrete definition of competitive advantage: superior performance resulting from sustainably higher prices, lower costs, or both.
The sequence of activities your company performs to design, produce, sell, deliver, and support its products is called the value chain. In turn, your value chain is part of a larger value system.
Henry Ford famously chose to operate his own rubber plantation in Brazil in the late 1920s, a decision that did not turn out too well. Ultimately, choices like this, about how vertically integrated you want to be, are choices every company makes about “where to sit” in the value system.
In thinking about your value chain, then, it’s important to see how your activities have points of connection with those of your suppliers, channels, and customers. The way they perform activities affects your cost or your price, and vice versa.
Most, I believe, know what a value chain is—the metaphor of a series of linked activities is intuitive. But many miss the “so what.” Why does it matter? The answer: The value chain is a powerful tool for disaggregating a company into its strategically relevant activities in order to focus on the sources of competitive advantage, that is, the specific activities that result in higher prices or lower costs
If your value chain looks like everyone else’s, then you are engaged in competition to be the best.
How does the long-term profitability in each of your businesses stack up against other companies in the economy?
Disaggregate your relative performance into its two components: relative price and relative cost. Relative price and cost are essential for understanding strategy and performance.
We now have a complete definition of competitive advantage: a difference in relative price or relative costs that arises because of differences in the activities being performed
The inevitable diffusion of best practices means that everyone has to run faster just to stay in place.
Strategy is the antidote to competitive rivalry.
Competitive advantage is not about beating rivals; it’s about creating superior value and about driving a wider wedge than rivals between buyer value and cost.
YOU CAN CALL any plan or program a strategy, and that’s how most people use the word. But a good strategy, one that will result in superior economic performance, is something else.
More simply put, you have found a way to perform better by being different.
Strategy
In this section of chapters, we’ll cover five tests every good strategy must pass: A distinctive value proposition A tailored value chain Trade-offs different from rivals Fit across value chain Continuity over time
The value proposition is the element of strategy that looks outward at customers, at the demand side of the business. The value chain focuses internally on operations. Strategy is fundamentally integrative, bringing the demand and supply sides together.
In terms of the five forces, this choice of customers insulated Walmart from direct rivalry with other discounters.
Typically, value propositions based on needs appeal to a mix of customers who might defy traditional demographic segmentation.
Some value propositions target customers who are overserved (and hence overpriced) by other offerings in the industry. A company can win these customers by eliminating unnecessary costs and meeting “just enough” of their needs.
