More on this book
Community
Kindle Notes & Highlights
Read between
January 20 - January 28, 2018
Very early in his career, he went after the single biggest and most consequential question in business: Why are some companies more profitable than others? One big question led to another. Why are some industries consistently more profitable than others, and what does this mean for the manager developing a strategy?
“The essence of strategy,” Porter often says, “is choosing what not to do.”
“What Is Strategy?” (1996), one of the most-cited and best-selling HBR articles of all time, and “The Five Competitive Forces That Shape Strategy” (2008),
If you enter Porter’s world, you will have to do without the catchy metaphors: no blue oceans, no dancing elephants, no moving cheeses. What you will get, instead, is a rigorous and clear mapping between your strategy and your organization’s financial performance, or, in the case of nonprofit organizations, between your strategy and your effectiveness in meeting a given social goal.
In this way, competitive advantage is about how your value chain will be different and your P&L better than the industry average.
Broadly speaking, strategy is the antidote to competition.
A tailored value chain is strategy’s second test.
Good strategies depend on the connection among many things, on making interdependent choices. A common piece of advice for managers has been to focus on their core activities and to outsource the rest. Fit challenges that bit of conventional wisdom.
Porter’s prescription: aim to be unique, not best. Creating value, not beating rivals, is at the heart of competition.
If rivals all pursue the “one best way” to compete, they will find themselves on a collision course.
In practice, most industries exhibit multiple scale curves, each based on serving different needs.
According to classical theory, perfect competition is the most efficient way to promote social welfare.
For Porter, strategic competition means choosing a path different from that of others.
Strategic competition means choosing a path different from that of others.
That cluster of differences, that uniqueness, is the very essence of competitive advantage, a topic we will explore fully in the chapters to come.
Competing to be the best feeds on imitation. Competing to be unique thrives on innovation.
The real point of competition is not to beat your rivals. It’s not about winning a sale. The point is to earn profits.
when what they’re buying is Undifferentiated
Substitutes—products or services that meet the same basic need as the industry’s product in a different way—put a cap on industry profitability.
The sweet spot isn’t always the lower-priced alternative. The Madrid–Barcelona high-speed train is a higher-value, higher-price substitute for flying.
Price competition, Porter warns, is the most damaging form of rivalry.
Rivals have high fixed costs and low marginal costs, creating the pressure to drop prices because any new customer will “contribute to covering overhead.” Again, the essence of airline economics.
Five forces analysis is used most often to determine the “attractiveness” of an industry, and this is certainly indispensible for companies and investors deciding whether to exit, enter, or invest in an industry.
Just to keep our terminology straight, for Porter strategy always means “competitive strategy” within a business.
Porter’s research shows that overall corporate return in a diversified corporation is best understood as the sum of the returns of each of its businesses.
For Porter, then, differentiation refers to the ability to charge a higher relative price.
Your cost advantage might come from lower operating costs or from using capital more efficiently (including working capital), or both.
Dell’s strategy resulted in negative working capital, which further enhanced Dell’s cost advantage.
We now have a concise, concrete definition of competitive advantage: superior performance resulting from sustainably higher prices, lower costs, or both.
Activities are discrete economic functions or processes, such as managing a supply chain, operating a sales force, developing products, or delivering them to the customer. An activity is usually a mix of people, technology, fixed assets, sometimes working capital, and various types of information.
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.
The sequence of activities your company performs to design, produce, sell, deliver, and support its products is called the value chain.
Disaggregate your relative performance into its two components: relative price and relative cost.
On the cost side, it is often revealing to disaggregate the cost advantage (or disadvantage) into that part due to operating cost (income statement) and that part due to the utilization of capital (balance sheet).
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 (see figure 3-6
No one has been better at OE competition than the Japanese, but, as Porter’s work documents in great detail, OE competition has led even the best of them to chronically poor profitability.
Strategy is the antidote to competitive rivalry.
The goal of strategy is to earn superior returns on the resources you deploy, and that is best measured by return on invested capital.
Walmart’s “key strategy,” in Walton’s own words, “was to put good-sized stores into little one-horse towns which everybody else was ignoring.”
Although people tend to think of Walmart as a fierce competitor, Walmart started out by completely avoiding head-to-head competition.
Doing so gave it many years of breathing room to develop and extend its positioning as a provider of everyday low prices.
The Enterprise value proposition is based on a simple insight: renting a car meets different needs at different times.
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 price, then by Porter’s definition, you don’t have a strategy. You’re competing to be the best.
Southwest chose not to pursue these industry “best practices”—some of them valid ways of competing that meet other needs on other types of routes.
Early in his career, Porter identified a set of generic strategies—focus, differentiation, and cost leadership—that quickly became one of the most widely used tools for thinking about key strategic choices.
Tailoring is possible only if there are limits, only if you are not trying to be all things to all people.
Only a value proposition that requires a tailored value chain to deliver it can serve as the basis for a robust strategy. This is the first line of defense against rivals.
While not every single activity need be unique, robust strategies always involve a significant degree of tailoring.
To establish a competitive advantage, a company must deliver its distinctive value through a distinctive value chain.
Thus the value proposition and the value chain—the two core dimensions of strategic choice—are inextricably linked. The value proposition focuses externally on the customer.
