Michael Porter - Founder of Monitor Strategy (Harvard, HBS)
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Michael Porter fleet the Institute of strategy and competitiveness at Harvard Business School
Joan Magretta worked with him for 2 decates, a Partner of Bain.
Porter is the evolution of Peter Drucker since he lived on a more competite industry moment.
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Strategy explains how an organization, faced with competitionwill achieve superior performance. The Definition is deceptively simple. The key to growth event survival is to stake out a position that is less vulnerable to attack from head-to-head opponents.
Part 1: Key Strategic Insights
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Competition: The Right Mindset
Only by competing to be unique can an organization achieve sustained superior performance.
In the vast majority of businesses, there is no single "best" way to compete.
If all rivals pursue the "one best way" to compete, they will end up on a collision course.
According to Porter, competition should be unique:
Strategic competition means choosing a different path from others, rather than competing to be the best.
The focus should be on competing to be unique, which is fundamentally about creating value.
Strategic Competition Overview
Strategic competition is all about making choices that are different from competitors and focusing on the value you deliver.
Past: Do what everyone else is doing (but spend less money doing it), or do something no one else can do (Porter).
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The Five Forces: Competing for Profits
Competition is more than a direct contest between rivals; it is a broader struggle over profits and a battle over who captures the value created by the industry.
Use the Five Forces Framework to gain insights into both industry performance and your company's performance.
The real objective of competition is not just to beat rivals—it's to earn profits.
The Five Forces Framework explains industry average prices and costs, helping determine average industry profitability.
The formula for profit is:
Profit = Price - Cost
Unit Profit Margin = Price - Cost
The Five Forces: Key Insights
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Strategy, as Porter, is a matter of working out your company’s best position relative not just to pricing pressures from rivals but to all the forces in your competitive environment.
Framework to analyze competition or to predict profitability.
Entry barriers protect the industry from newcomers who would add new capacity.
What makes the industry vulnerable to entry?
A new entry may be more efficient if it has built the newest plant/process.
Powerful buyers force prices down or demand more value, capturing more of the value for themselves.
A buyer is powerful if: It purchases large volumes; if the component of its products represents a significant fraction; it earns low profits, which create great incentive to lower its purchasing costs - “If you want to learn how to buy, look for industries with low margin, those are the best buyers to learn with”, SF.
Powerful suppliers charge higher prices or insist on more favorable terms, which lowers industry profitability.
What determines the bargaining power of suppliers?
A supplier is powerful if: product is unique; is not obliged to contend with other products for sale.
Substitutes put a cap on industry profitability by meeting the same basic need differently.
Intense rivalry leads companies to compete away the value they create, either by lowering prices or through higher competition costs. Riralry is related to the presence of:
Lack of differentiation - When positioning yourself in the market, always look for a differentiation.
When these forces are weak, as in SaaS and soft drinks, many companies are profitable.
When the forces are strong as in Airlines and Hotel industries, almost no company earns an attractive return on investment. Education and financial services are better than hospitality.
Industry Analysis:
To conduct an effective industry analysis, consider these key questions:
Why is current industry profitability what it is?
Understand the factors influencing profitability at present.
What’s propping it up?
Identify the elements that sustain current profitability.
What’s changing?
Determine which industry dynamics are shifting.
How is profitability likely to shift?
Predict potential changes in profitability moving forward.
What limiting factors must be overcome to capture more value?
Recognize the barriers that need to be addressed to capture additional value.
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Competitive Advantage: The Value Chain and P&L
Competitive advantage allows you to draw a clear link between the value you create, how you create it through your value chain, and how this impacts your P&L.
It is about creating value differently from your rivals.
Your value chain must be different and ideally better than the industry average.
Strategy choices are aimed at shifting relative price or cost in the company’s favor.
The value chain represents the sequence of activities your company performs—design, production, sales, delivery, and support. Each step should add incremental value to the final product or service.
Your value chain is part of a larger value system that includes suppliers, partners, and customers.
The goal is to see each activity not just as a cost, but as a value-adding step in delivering the final product or service.
Part 2: What Is Strategy?
5 Tests Every Good Strategy Must Pass
Distinctive Value Proposition - Single ideal competitive position
Tailored Value Chain
Trade-offs Different from Rivals
Fit Across the Value Chain
Continuity Over Time
1 & 2 - Creating Value: The Core
A distinctive value proposition only translates into a meaningful strategy if the activities required to deliver it are different from those of rivals.
The value proposition is the element of strategy that looks outward to customers (demand side), while the value chain focuses internally on operations (supply side). Strategy integrates both sides, bringing demand and supply together.
Value propositions are typically based on customer needs that appeal to a mix of customers, often going beyond traditional demographic segmentation.
The first test of strategy is whether your value proposition is different from your rivals'. If you are serving the same customers, meeting the same needs, and selling at the same price, then you do not have a strategy (according to Porter's definition).
Choices in the value proposition that limit what a company will do are essential because they create the opportunity to tailor activities in ways that deliver the targeted value effectively.
3- Trade-offs: The Linchpin
The third test of strategy may be the hardest: making trade-offs means accepting limits, such as saying no to some customers in order to better serve others.
Say no: A crucial part of strategy is being selective about what you do.
Trade-offs are the strategic equivalent of a fork in the road—if you take one path, you cannot simultaneously take the other.
If you have a clear strategy, you should be able to link it directly to your P&L.
Trade-offs are choices that make strategies sustainable because they are difficult for competitors to match or neutralize.
When you try to offer something for everyone, you tend to relax the trade-offs that underpin your competitive advantage, which can ultimately weaken your position.
4- Fit: The Amplifier
The fourth test of strategy is fit.
Fit relates to how the different activities in the value chain are interconnected and support each other.
Good strategies rely on the connection among various activities and on making choices that are mutually reinforcing.
Fit means that the value or cost of one activity is influenced by how other activities are performed.
A common mistake in strategy is choosing the same core competencies as everyone else in the industry, which reduces differentiation.
5- Continuity: The Enabler
Porter's fifth test of strategy addresses the risk of changing too much and in the wrong ways. It takes time to develop a real competitive advantage, understand the value you create, and achieve tailoring, trade-offs, and fit.
Continuity in strategy will change your perception of change itself—it’s crucial for companies to understand that stability is key for long-term success.
Continuity of strategy does not mean standing still; as long as there is stability in the core value proposition, there can and should be significant innovation in how it's delivered.
Great strategies are rarely built on precise predictions of the future; they rely more on solid principles that withstand different market conditions.
Deliberate and explicit strategy setting becomes more important, especially during times of change and uncertainty.
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Strategic Practices and References
Benchmarking and Adopting Best Practices:
A veiled reference to "In Search of Excellence" (1982) by Tom Peters and Robert Waterman, highlighting the importance of identifying and emulating industry best practices.
Aggressive Outsourcing and Partnering to Improve Efficiencies:
Possibly a reference to "The Origin of Strategy" (1989) by Bruce Henderson, founder of BCG, which discusses outsourcing and partnering as tools to improve operational efficiencies.
Focusing on Key Success Factors, Critical Resources, and Core Competencies:
Likely inspired by C.K. Prahalad and Gary Hamel in their 1990 article, "The Core Competence of the Corporation", which emphasizes leveraging critical resources and focusing on core competencies.
Rapidly Responding to Competitive and Market Changes:
A possible reference to Rita McGrath and Ian MacMillan in their 1995 article on innovation strategy, "Discovery-Driven Planning", which stresses the importance of agility and adaptability in an evolving competitive landscape.
Formulation of Strategy
After analyzing the Five Forces, the corporate strategist can identify the company's strengths and weaknesses and create an effective plan of action, which may include:
Positioning the Company:
Position the company so that its capabilities provide the best defense against the competitive forces.
Influencing the Balance of Forces:
Use strategic moves to influence the balance of the forces, thereby improving the company's competitive position.
Anticipating Shifts:
Anticipate shifts in factors underlying the competitive forces and create strategies to respond to these changes effectively.
Highlights:
Unique Competition: Focus on being unique rather than just the best.
Five Forces Framework: Analyze industry dynamics to understand profitability.
Value Chain: Differentiate your activities to achieve competitive advantage.
Five Tests of Good Strategy: Ensure your strategy passes tests like distinctive value, tailored value chain, and continuity.
Trade-offs & Fit: They are critical for making strategies sustainable and impactful.
