Written in 1980, Competitive Strategy, has formed the basis of modern strategic thinking for three decades. Amazon says that the book is now in its 60th edition and has been translated into 19 languages. It is still a great book to read though the recent bankruptcy of Michael Porter’s company, Monitor Group, has someone tarnised the image of the management guru.
Strategy, business strategy, business concept, competitive advantage, positioning, market differentiation, technology innovation, customer service, five forces
Is this book really 30 years old? The basic idea of the book is that a company can have one of three generic strategies. It may try to compete through cost leadership by having the lowest cost structure (modern examples include : WalMart, South West Airlines, Ryan Air). Alternatively, it may try to show its customers that its products are services are somehow different (better quality, quicker service etc.) so that it can charge more for them. This has been the case with companies such as Singapore Airlines that has differentiated from its rivals through the uniforms worn by the staff, the level of service and technology innovations such as being the first company to instill individual TVs for economy class passengers. There is one other way in which a company can position itself to gain a strategic advantage by offering a product or service to a niche market. This is the case with Netjets in the private jet market..
The examples may seem a little dated to the younger reader. Porter talks of Apple though there is no mention of Microsoft in this book. However, he was able to predict that the industry of computer service bureaus might be in for tough times with the recent launch of PCs onto the market. Porter also predicted the demise of the then mighty Polaroid company.
Ironically, a technical innovation that the company had invented itself put it in danger for the future. In recent years, Polaroid went through several bankruptcies.
From strategic positioning Porter goes on to give an outline of the five forces that affect the performance of a firm. Until this time, it was assumed that only other companies in the same industry could have an external impact on this. Porter showed this to be fallacious and that buyers, sellers, companies not yet in the industry and other products might all have an impact. These theories have become the staple diet of any student doing a course on strategy over the last three decades.
Indeed, 30 years on this book still reads like a beautiful essay with a clear and coherent message. The fundamental ideas seem so simple that:
- Thousands of professors have claimed that they could have written the book themselves (perhaps…but they didn’t!)
- Many students having studied Competitive Strategy for an hour or so have claimed “I’ve done Porter, I know that now.” (maybe…but they usually don’t!)
Porters ideas are stunningly simple (and it always takes a great man to make complex ideas seem easy). Of course, as any businessman will tell you, putting those simple ideas into practice is another matter.
Interesting quotes from the book:
Every firm competing in an industry has a competitive strategy, whether explicit or implicit.
“The goal of competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defend itself against these competitive forces or can influence them in its flavor.”
Competition in an industry continually works to drive down the rate of return on invested capital toward the competitive floor rate of return, or the return that would be earned by the economist’s “perfectly competitive” industry. This competitive floor, or “free market” return, is approximated by the yield on long-term government securities adjusted upward by the risk of capital loss.
A barrier to entry is created by the presence of switching costs, that is, one-time costs facing the buyer of switching from one supplier’s product to another’s.
The threat of entry into an industry depends on the barriers to entry that are present, coupled with the reaction from existing competitors that the entrant can expect.
The five competitive forces—entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among current competitors—reflect the fact that competition in an industry goes well beyond the established players.
A buyer group is powerful if the following circumstances hold true: It is concentrated or purchases large volumes relative to seller sales.
Developing a competitive strategy is developing a broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals.
Industry structure has a strong influence in determining the competitive rules of the game as well as the strategies potentially available to the firm.
Since the collective strength of the forces may well be painfully apparent to all competitors, the key for developing strategy is to delve below the surface and analyze the sources of each.
Cost leadership requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on.
Low-cost position protects the firm against all five competitive forces because bargaining can only continue to erode profits until those of the next most efficient competitor are eliminated, and because the less efficient competitors will suffer first in the face of competitive pressures.
Once stuck in the middle, it usually takes time and sustained effort to extricate the firm from this unenviable position. Yet there seems to be a tendency for firms in difficulty to flip back and forth over time among the generic strategies. Given the potential inconsistencies involved in pursuing these three strategies, such an approach is almost always doomed to failure.
There is no single relationship between profitability and market share.
The bargaining power of this group of buyers, viewed in aggregate terms, is one of the key competitive forces determining the potential profitability of an industry.
Smaller firms are often more efficient where personal service is the key to the business.
In some industries like aluminum fabricating, building supply, and many distribution businesses, a local presence is essential to success. Intense business development, contact building, and sales effort on a local level are necessary to compete.
Computer service bureaus are facing increasing competition from minicomputers and microcomputers. This new technology means that even the small- and medium-sized firm can afford to have its own computer.
This development has increased the economies of scale in the service bureau industry and is leading to consolidation.
Strategy cannot be formulated without an explicit or implicit forecast of how the structure of the industry will evolve. A firm may escape maturity by competing internationally where the industry is more favorably structured. This straightforward approach has been practiced, for example, by Crown Cork and Seal in metal containers and crowns, and Massey-Ferguson in farm implements.
Vertical integration assures the firm that it will receive available supplies in tight periods or that it will have an outlet for its products in periods of low overall demand.
Backward integration can allow the firm to enhance differentiation.
Overbuilding is indeed a problem that has repeatedly and severely plagued many industries – paper, shipping, iron ore, aluminum, and many chemical businesses, just to name a few.
The essence of the capacity decision, then, is not the discounted cash flow calculation but the numbers that go into it, including probability assessments about the future. Estimating these is in turn a subtle problem in industry and competitor analysis (not financial analysis).
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Differentiate Your Business: ““Competitive Strategy by Michael E. Porter is a classic business strategy text and must read for anybody who has a serious interest in business strategy.”
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