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Mysummary:

Understanding Michael Porter

Theessentialguidetocompetitionandstrategy ByJoanMagretta

1. What is competition?
1.1 The right mindset Agoodcompetitivestrategywillresultinsustainablysuperiorperformancestrategyexplainshow anorganization,facedwithcompetition,willachievesuperiorperformance Oneofthereasonssomanycompaniesfailtodevelopgoodstrategiesisthatthepeoplerunning themoperatewithfundamentalmisconceptionsaboutwhatcompetitionisandhowitworkshow oftenhaveyouheardthecalltomakeyourcompanythebestintheindustry?competingtobe thebestistheabsolutelywrongwaytothinkaboutcompetitionwillleadyouinevitablytoa flawedstrategytomediocreperformance InwarinsportstherecanonlybeonewinnerInbusinessyoucanwinwithoutannihilating yourrivalsbusinesscompetitionismorecomplex,moreopenendedandmultidimensionalRather thanenteraparticularracewithaparticularrivalcompaniescanchoosetocreatetheirown eventinthevastmajorityofbusinesses,thereissimplynosuchthingasthebestIsthereabest carabesthamburgerabestmobilephone???Inmostindustries,therearemanydifferent customerswithdifferentneeds Competingtobethebestleadsinevitablytoadestructive,zerosumcompetitionthatnoonecan winCustomersmaybenefitfromlowerpricesasrivalsimitateandmatcheachothersofferings, buttheymayalsobeforcedtosacrificechoiceeitherpayingtoomuchforextrasyoudontneed (overserved)orbeingforcedtomakedowithwhatsoffered,evenifitsnotreallywhatyouneed (underserved). Insteadofcompetingtobethebest,companiescanandshouldcompetetobeuniquethis conceptisallaboutvalueuniquenessinthevalueyoucreateandhowyoucreatecompeting aimedatservingdifferentsetsofneedsandcustomerscreatingsuperiorvalueforchosen customersherepriceisonlyonecompetitivevariable 1.2 Competing for profits Therealpointofcompetitionisnottobeatyourrivalsnotwinningasalethepointistoearn profitscompetingforprofitsismorecomplexastruggleinvolvingmultipleplayer current/existingrivalscustomerssupplierssubstituteproductspotential/newrivals

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Thefiveforces theintensityofrivalryamongexistingcompetitors, thebargainingpowerofbuyers(theindustryscustomers), thebargainingpowerofsuppliers, thethreatofsubstitutes,and thethreatofnewentrants

Thesefiveforces determinetheindustrysstructure, zeroinonthecompetitionyouface, gaveyouthebaselineformeasuringsuperiorperformance,and explaintheindustrysaveragepricesandcoststheaverageprofitabilityyouaretryingto beat

Themathforprofitabilityissimple:UnitProfitMargin=PriceCostcostsincludealltheresources usedincompeting;includingthecostofcapitalpricesreflecthowcustomersvaluetheindustrys offerings/whattheyarewillingtopay Hereshowthefiveforcesimpactprofitability: Increasingthreatofnewentry:profitabilitydeclinesbecausepricesgodownand/or costsgoup Increasingsupplierpower:profitabilitydeclinesbecausecostsgoup Increasingbuyerpower:profitabilitydeclinesbecausepricesgodownand/orcostsgoup Increasingthreatofsubstitutes:profitabilitydeclinesbecausepricesgodownand/or costsgoup Increasingpowerofrivals:profitabilitydeclinesbecausepricesgodownand/orcostsgo up

Industrystructureisdynamic,notstaticsosomeorallforcesshiftovertimeindustryprofitability willfollowfiveforcesanalysiscanhelpanticipateandexploitstructuralchanges 1.3 Competitive advantage Competitiveadvantageissuperiorvaluesuperiorperformancecomparedwithrivals,youoperate atlowercosts,commandhigherprices,orbothifstrategyistohaveanyrealmeaningatall,itmust linkdirectlytoyourcompanysfinancialperformance ForPorterstrategyalwaysmeanscompetitivestrategywithinabusiness...thebusinessunitandnot thecompanyoverall,isthecorelevelofstrategy Thefinancialmeasurethatbestcapturestheperformanceideaisthereturnoninvestedcapital (ROIC): ROIC=aftertaxoperatingIncome/bookvaluesofinvestedcapital aftertaxoperatingIncome=earningsbeforeinterestandtaxesx(1taxrate)=EBITx(1 taxrate) bookvaluesofinvestedcapital=fixedassets+currentassetsnoninterestbearingcurrent liabilitiescash=bookvalueofdebt+bookvalueofequitycash

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Ultimately,allcostandpricedifferencesbetweenrivalscompetitiveadvantagesarisefrom hundredsofactivitiesthatcompaniesperformastheycompete.Activitiesarediscreteeconomic functionsorprocesses,suchasmanagingasupplychain,operatingasalesforce,developing products,ordeliveringthemtocustomers. Thesequencesofactivitiesyourcompanyperformstodesign,produce,sell,deliverandsupportits productsiscalledthevaluechain Thevaluechainisapowerfultoolfordisaggregatingacompanyintoitsstrategicallyrelevant activitiesinordertofocusonthesourcesofcompetitiveadvantage,thatis,thespecificactivitiesthat resultinhigherpricesorlowercosts Valuechainanalysis: startbylayingouttheindustryvaluechain compareyourvaluechaintotheindustrys zeroinonpricedrivers,thoseactivitiesthathaveahighcurrentorpotentialimpacton differentiationtocreatesuperiorperformance/valueforyourcustomers zeroinoncostdrivers,payingspecialattentiontoactivitiesthatrepresentalargeorgrowing percentageofcosts

Competitiveadvantageisthedifferenceinrelativepriceand/orcostscomparedwithrivals thatarisesbecauseofdifferencesintheactivitiesbeingperformedperformingdifferentactivities notthesameactivitiesasyourrivalsthelatteriscompetingtobethebestunlikelytoproducea competitiveadvantage

2. What is strategy?
Strategyisasetofintegratedchoicesthatdefinehowyouwillachievesuperiorperformance (competitiveadvantage)inthefaceofcompetition. Therearefivetestseverygoodstrategymustpass: Adistinctvalueproposition Atailoredvaluechain Tradeoffsdifferentfromrivals Fitacrossthevaluechain Continuityovertime

2.1 Value proposition Choosingaparticularkindofvalueyouwillofferyourcustomersisthecoreofcompetingtobe uniquethevaluepropositionistheelementofstrategythatlooksoutwardatcustomersatthe demandsideofthebusiness Thevaluepropositionanswersthethreefundamentalquestions: Whichcustomersareyougoingtoserve? Whichneedsareyougoingtomeet? Whatrelativepricewillprovideacceptablevalueforcustomersandacceptableprofitability forthecompany?

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2.2 Tailored value chain Adistinctivevaluepropositionwillnottranslateintoameaningfulstrategyunlessthebestsetof activitiestodeliveritisdifferentfromtheactivitiesperformedbyrivalsthevaluechainfocusses internallyonoperation. Strategymeansdeliberatelychoosingadifferentsetofactivitiestodeliverauniquemixofvalue. Insightintocustomersneedsisimportantbutnotenough.Theessenceofstrategyandcompetitive advantageliesintheactivities,inchoosingtoperformactivitiesdifferentlyortoperformdifferent activitiesfromyourrivalsYourvaluechainmustbespecificallytailoredtodeliveryourvalue proposition. 2.3 Tradeoffs StrategyrequireschoiceTradeoffsisthechoicewhatnottodoDecidingwhichneedtoserveand whichproducttoofferitabsolutelykeytodevelopingastrategybutitisjustasimportanttodecide whichneedsyouwillnotserve,andwhichproducts,features,orservicesyouwontoffer Buildingandsustainingcompetitiveadvantagemeansthatyoumustbedisciplinedaboutsayingno toahostofinitiativesthatwouldbluryouruniquenesstodeliberatelymakesomecustomers unhappytradeoffsmakestrategiessustainablebecausetheyarenoteasytomatch,tocopy,orto neutralize 2.4Fit Fithastodowithhowtheactivitiesinthevaluechainrelatetooneanotherfitmeansthatthe valueorcostofoneactivityisaffectedbythewayotheractivitiesareperformedthat thereisabasicconsistency,whereeachactivityisalignedwiththecompanysvalue proposition activitiescomplementorreinforceeachotherthevalueofeachactivityisraisedbythe other thereisasubstitutionperformingoneactivitymakesitpossibletoeliminateanother

Fitdeterimitationbecauserivalswillhaveahardtimefiguringoutwhattheyhavetomatchrivals willhaveahardtimereplicatingalltheinterconnections,becauseitisorganizationallychallenging 2.5Continuity Auniquevaluepropositionandatailoredvaluechainarethecoreofastrategy.Tradeoffsmakethe differencesinpriceandcostpossibleandsustainable.Fitisanamplifier,enhancingthecostandprice differencesthataretheessenceofcompetitiveadvantage,andmakingitevenharderforrivalsto copythestrategy.Continuityisanenabler Continuityreinforcesacompanysidentityitbuildsacompanysbrand,itsreputation,and itscustomerrelationships. Continuityhelpssuppliers,channels,andotheroutsidepartiestocontributetoacompanys competitiveadvantage. Continuityfostersimprovementsinindividualactivitiesandfitacrossactivities;itallowsan organizationtobuilduniquecapabilitiesandskillstailoredtoitsstrategy.

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Strategyisapath,notafixedpoint.Aneffectivestrategyisdynamic.Itdefinesadesiredoutcome, notallthemeansofachievingitSomekindsofchangeareabsolutelycriticaltomaintaining competitiveadvantageContinuitygivesanorganizationthetimeitneedstodeepenits understandingofthestrategyStrategiesoftenemergethroughtheprocessofdiscoverythatcan takeyearsoftrialanderrortheremustbeastablecoretobeginwith,oratleastagrounded hypothesisabouthowthecompanyisgoingtocreateancapturevaluecontinuityofdirection makeseffectivechangemorelikelyitiseasiertochangewhenyouknowwhoyouareandwhat youstandfor Whendoesstrategyneedtochange? Customerneedchange,acompanyscorevaluepropositionmaysimplybecomeobsolete. Innovationofallsortscanservetoinvalidatetheessentialtradeoffsonwhichastrategy relies. Technologicalormanagerialbreakthroughcancompletelytrumpacompanysexistingvalue proposition.

Whatmustchange? Stayonthefrontierofoperationaleffectivenessyoumustcontinuouslyassimilatebest practicesthatdonotconflictwithyourstrategyorthetradeoffsessentialtoit Changewhenevertherearewaystoextendyourvaluepropositionorbetterwaystodeliver ittheseopportunitiestoinnovatearisepreciselybecauseyouhaveastrategy

Thedeliberateandexplicitsettingofstrategyismoreimportantthaneverduringperiodsofchange anduncertaintyastrategywithitsfocusonthespreadbetweencustomervalueandcost,guards againstthetendencytofollowfadsblindly.

3. Closing words
Keepaclearlineofsightbetweendecisionandperformancenocheatingallowedyoumustbe preciseandrigorousaboutit Porterrefusestotellyouwhattodohegivesyouguidingframeworks,ageneraltheorythatapplies inallcases,buttheworkyoudoiscreativeandyouhavetofindyourownuniqueanswer Sources: Book: amazon(http://www.amazon.com/UnderstandingMichaelPorterEssential Competition/dp/1422160599 Papers: Porter,HBR,Whatisstrategy?http://cfe.unc.edu/pdfs/what_is_strategy.pdf, http://www.ipocongress.ru/download/guide/article/what_is_strategy.pdf Porter,HBR,,http://polisci2.ucsd.edu/snunnari/HBR_on_Strategy_23_41.pdf,http://www.asec sldi.org/dotAsset/292822.pdf

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