Understanding Michael Porter: The Essential Guide to Competition and Strategy

by Joan Magretta

“The essence of strategy,” Porter often says, “is choosing what not to do.”

Only by competing to be unique can an organization achieve sustained, superior performance.

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.

Competition focuses more on meeting customer needs than on demolishing rivals.

In the vast majority of businesses, there is simply no such thing as “the best.”

Over time, rivals begin to look alike as one difference after another erodes. Customers are left with nothing but price as the basis for their choices.

Instead of competing to be the best, companies can—and should—compete to be unique.

Strategic competition means choosing a path different from that of others.

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.

Powerful buyers will force prices down or demand more value in the product, thus capturing more of the value for themselves.

Powerful suppliers will charge higher prices or insist on more favorable terms, lowering industry profitability.

If rivalry is intense, companies compete away the value they create, passing it on to buyers in lower prices or dissipating it in higher costs of competing.

“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.”

If you have a real competitive advantage, it means that compared with rivals, you operate at a lower cost, command a premium price, or both.

Strategy choices aim to shift relative price or relative cost in a company’s favor.

You begin to see each activity not just as a cost, but as a step that has to add some increment of value to the finished product or service.

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.

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

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

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

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

A common mistake in strategy is to choose the same core competences 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.

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.

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

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

Paradoxically, continuity of strategy actually improves an organization’s ability to adapt to changes 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.

Strategy makes priorities clearer.

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

The worst mistake—and the most common one—is not having a strategy at all. Most executives think they have a strategy when they really don’t.