Understanding Michael Porter: The Essential Guide to Competition and Strategy

by Joan Magretta

But it is just as important to decide which needs you will not serve, and which products, features, or services you won’t offer. And then comes the hard part—sticking to those decisions.

The arguments that lead to feature creep are all too familiar: the incremental cost of adding a feature is minimal; we need the revenue growth; we have to match what our rivals are offering; our customers are telling us this is what they want. (For nonprofits, “mission creep”—off-target projects undertaken to please big donors or staff—is the analogous problem.)

When you try to offer something for everyone, you tend to relax the trade-offs that underpin your competitive advantage.

When you try to offer something for everyone, you tend to relax the trade-offs that underpin your competitive advantage.

The notion that the customer is always right is one of those half-truths that can lead to mediocre performance. Trade-offs explain why it is not true that you should give every customer what he or she wants. Some of those customers are not your customers, and you should send them packing, ideally with the same flair and humor that came naturally to Kelleher.

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

Good strategies depend on the connection among many things, on making interdependent choices.

Good strategies depend on the connection among many things, on making interdependent choices.

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.

Fit means that the value or cost of one activity is affected by the way other activities are performed.

Zara’s customers shop more often than customers of comparable stores, and they buy more merchandise at full price. According to data I saw a few years ago, Zara was marking down about 10 percent of items versus the industry average of 17 to 20 percent. In retailing, that’s a huge advantage.

The first kind of fit is basic consistency, where each activity is aligned with the company’s value proposition and each contributes incrementally to its dominant themes.

Porter has created a tool he calls an “activity system map” to chart a company’s significant activities, their relationship to the value proposition, and to each other.

In many companies, the search for competitive advantage focuses on what are variously called critical resources, core capabilities, or key success factors.

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

However, Porter argues that outsourcing is risky for activities that are or could be tailored to strategy, and especially for those activities that are strongly complementary with others.

Whereas the spotlight is more often directed at companies that change too little, Porter highlights an equal, if not greater, mistake: companies can change too much, and in the wrong ways. And, he argues, having a strategy—making choices, defining limits—doesn’t impair your ability to change. It actually facilitates the right kind of innovation.

Allow me one cooking metaphor: strategy isn’t a stir fry; it’s a stew. It takes time for the flavors and textures to develop. Over time, as all of a company’s constituents—internal and external—come to a deeper understanding of what a company can offer them, or what they can offer to it, a whole raft of activities become better tailored to the strategy and better aligned with each other.

It usually takes years, not months, to successfully implement a new strategy.

Now think about what a strategy shift like this involves for a company with 200,000 employees. Old ways of doing things had to be dismantled and unlearned as new structures, systems, and processes were put in place. Product development had to be overhauled. Production capacity had to be reduced. Labor agreements had to be renegotiated. Marketing needed to be revamped. Four years into the process, Mulally estimates it will take another three years for 80 percent of Ford’s products to be built on global platforms.

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.

I can’t predict the future. Strategy requires a prediction of the future. Therefore, I can’t commit to a strategy.

Great strategies are rarely, if ever, built on a particularly detailed or concrete prediction of the future. Walmart, for example, found itself in the midst of a revolution in retailing, yet its strategy didn’t require Walmart to predict the direction that revolution would take.

First, as customer needs change, a company’s core value proposition may simply become obsolete.

Second, innovation of all sorts can serve to invalidate the essential trade-offs on which a strategy relies.

Third, a technological or managerial breakthrough can completely trump a company’s existing value proposition.

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.’”

Many executives, cheered on by management gurus, have embraced flexibility as an alternative to strategy. But if you apply the economic fundamentals of competitive advantage, you’ll be quick to spot the flaw in this approach. Ask yourself, Where’s the link between flexibility and superior performance? Is it likely that flexibility will meet any customer’s needs better than a strategy sharply focused on those needs?

The problem, Porter argues, is that when you substitute flexibility for strategy, your organization never stands for anything or becomes good at anything. Flexibility sounds good in theory, but trace it down to the concrete level of the activities you perform and you’ll see why flexibility without strategy will guarantee mediocrity—tailoring will be poor, trade-offs nonexistent, fit impossible.

With any new technology or management innovation, some uses are going to be best practices that everyone will have to adopt. Other uses will have strategic significance, and you must assess these carefully.

Second, you must change whenever there are ways to extend your value proposition or better ways to deliver it. These changes are strategy specific, and would not benefit all companies equally. To some extent, these opportunities to innovate arise precisely because you have a strategy to begin with. Almost from the day CEO Reed Hastings started Netflix to distribute DVDs by mail, he began searching for an Internet-based solution. When it became feasible to stream videos direct to a customer’s PC, Netflix saw immediately that doing so would better serve the needs around which its strategy was built in the first place. Mail order was one way of executing its “direct” model. Streaming would further cut the time and the associated logistics costs of shipping DVDs back and forth to a customer’s home.

The answer is always the same: each was able to create a complex business system elegantly configured to produce a certain kind of value in a specific industry context. Let me underscore that these organizations have spent decades honing these systems, these intricate complex wholes. This is why continuity over time is one of Porter’s five tests, and why I call it the enabler.

Strategy is about the whole, not the parts. There must be a stable core to begin with, or at least a grounded hypothesis about how the company is going to create and capture value.

‘Most of us, not having an airline background, had no idea that we couldn’t do this, so we just did it.’ ”

The principle of continuity reminds us, however, that not all change is good, that too much change can be bad, and that not all change requires a change in strategy. If you can grasp the role continuity plays in strategy, it will change your thinking about change itself. Paradoxically, continuity of strategy actually improves an organization’s ability to adapt to changes in the environment and to innovate.

If you don’t have a strategy, then anything and everything could be important. A strategy helps you to decide what’s important because you know who you’re trying to serve, what needs you’re trying to meet, and how your value chain is distinctively configured to do so at the right price.