Understanding Michael Porter: The Essential Guide to Competition and Strategy

by Joan Magretta

IN THE LAST CHAPTER, I presented Porter’s first two tests of strategy: a unique value proposition and the tailored value chain required to deliver it. If there is one important takeaway message, it is that strategy requires choice.

If you are successful and competitors aren’t asleep at the switch, they will try to copy what you do. But trade-offs will get in their way. By their very nature, trade-offs are choices that make strategies sustainable because they are not easy to match or to neutralize. If there are no trade-offs, any good idea can be copied. Product features can be copied. Services can be copied. Ways of delivering value can be copied. But where there are trade-offs, the copycat will pay an economic penalty.

Trade-offs are choices that make strategies sustainable because they are not easy to match or to neutralize.

Clarity about what you won’t do, then, is the best way to succeed at what you do choose to do.

Building and sustaining competitive advantage means that you must be disciplined about saying no to a host of initiatives that would blur your uniqueness. The notion that the customer is always right is one of those half-truths that can lead to mediocre performance.

“Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do.”

That, in fact, is a good working definition: fit means that the value or cost of one activity is affected by the way other activities are performed.

Most fashion retailers can live with lead times of three months. Zara’s are just two to four weeks, allowing it to release one hundred collections per year.

A common mistake in strategy is to choose the same core competences as everyone else in your industry.

WE COME NOW TO the fifth and final test of strategy: continuity over time. To recap: the first two tests—a unique value proposition and a tailored value chain—are the core of a strategy. Trade-offs, the third test, are the economic linchpin. They make differences in price and cost possible and sustainable. Fit, the fourth test, is an amplifier, enhancing the cost and price differences that are the essence of competitive advantage, and making it even harder for rivals to copy the strategy. Continuity is the enabler. All the other elements of strategy—tailoring, trade-offs, fit—take time to develop. Without continuity, organizations are unlikely to develop competitive advantage in the first place.

Continuity of strategy does not mean that an organization should stand still. As long as there is stability in the core value proposition, there can, and should, be enormous innovation in how it’s delivered.

In 1850, Paul Julius Reuter found an ingenious way to speed the delivery of global financial information to market participants. His new technology was the carrier pigeon. The company Reuter founded survives to this day, although the pigeons gave way to a series of technological innovations, beginning with the telegraph and culminating in the Internet. Reuters continues to serve the enduring need for rapid information about financial markets, albeit with a very different set of activities today than it used more than 150 years ago.

Today, for example, Walmart is the largest seller of groceries in the United States, a business that Walmart entered only in the late 1980s.

Great strategies are rarely, if ever, built on a particularly detailed or concrete prediction of the future.

Many factors beyond demographics and social change can cause customer needs to shift.

Third, a technological or managerial breakthrough can completely trump a company’s existing value proposition. Of all the forces that threaten strategies, none gets more attention than technology.

Says Mulally, “‘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.’” Porter couldn’t have said it better himself.

The problem, Porter argues, is that when you substitute flexibility for strategy, your organization never stands for anything or becomes good at anything.

When you substitute flexibility for strategy, your organization never stands for anything or becomes good at anything.

Strategy is a path, not a fixed point.

Continuity gives an organization the time it needs to deepen its understanding of the strategy. Sticking with a strategy, in other words, allows a company to more fully understand the value it creates and to become really good at it.

Strategies often emerge through a process of discovery that can take years of trial and error as the company tests its positioning and learns how best to deliver it.

There is no denying that dumb luck has played a role in some extraordinary business successes.

Put in human terms, it is easier to change when you know who you are and what you stand for, and very difficult to change when you don’t.

The deliberate and explicit setting of strategy is more important than ever during periods of change and uncertainty.

Classics, he quipped, are works that everybody wants to have read but nobody wants to read.

Now, as I have come to the end, I finally get the point of Twain’s joke. It’s not that the classics are too hard. It’s that we are too lazy and demand too little of ourselves.

“Every rereading of a classic is as much a voyage of discovery as the first reading.”

Ten Practical 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 not about beating rivals; it’s about creating unique value for customers. If you have a competitive advantage, it will show up on your P&L. A distinctive value proposition is essential for strategy. But strategy is more than marketing. If your value proposition doesn’t require a specifically tailored value chain to deliver it, it will have no strategic relevance. Don’t feel you have to “delight” every possible customer out there. The sign of a good strategy is that it 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 c...

So in many companies, strategy is built around the value proposition, which is the demand side of the equation.

It’s often hard, for example, to get the kind of cost information you need to think strategically.

Economists have been studying mergers for twenty years and they find that the seller gets most of the value, not the buyer. Foreign acquisitions must be forcefully repositioned around your strategy, not allowed to continue theirs (unless, of course, theirs is better!).

But the business model doesn’t help you to develop or to assess competitive advantage, which is what strategy aims to do.

When you’re going for competitive advantage, you’re trying to be unique. When you’re trying to change the industry structure, you want everyone else to follow you.

Communicating the strategy is really important. Strategy is useless if it’s a secret, if nobody else in the organization knows what the strategy is. The purpose of strategy is to align the behavior of everyone in the organization and to help them make good choices when they’re on their own.

Good leaders are strategy professors, in the sense that they’re teaching strategy all the time. They’re giving lots of little talks about strategy. They start every meeting with the twenty-fifth repetition of the essence of the value proposition.

strategy. Don’t assume that stock analysts will figure it out. You’ve got to tell them.

competition: The term is commonly used to refer to rivals and rivalry, but for Porter, this definition is too narrow. 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.

competitive advantage: The term is commonly used to mean “Here’s what we think we’re good at,” as in “Our competitive advantage is technology.” Or, it is used even more loosely, as in “Our competitive advantage lies in our people.” Porter’s definition is tightly linked to the economics of competition: you have competitive advantage if your profitability is sustainably higher than that of your rivals. Then you can dig further to understand whether that advantage comes from higher prices, lower costs, or some combination of both. These differences in relative price or relative costs arise because of differences in the activities being performed.