AreviewofkeystrategyideasfromMichaelPorter,withouttheFiveForces/FiveFactorscompiledfrom:“UnderstandingMichaelPorter–TheEssentialGuidetoCompetitionandStrategy”byJoanMagretta.HarvardBusinessReviewPress,copyright2012byJoanMagrettaAgoodcompetitivestrategywillresultinsustainablysuperiorperformance.Strategyexplainshowanorganization,facedwithcompetition,willachievesuperiorperformance.Thisdefinitionisdeceptivelysimple.ANo-WinStrategy:CompetingToBe“TheBest”.Howoftenhaveyouheardanorganization’sleadersurgingtheirpeopletobe“thebest”?Howoftenhaveyouheardthecalltomakeyourcompanythe“bestinitsindustry”?Companiesproudlyproclaimthattheyproducedthe“best”products,providethe“best”service,andattractthe“best”talent.Thesephrasesreflectanunderlyingbeliefaboutthenaturecompetitionthatfeelssointuitivelycorrectthatmostpeople,thatis,almostneverexaminedthequestion.Ifyouwanttowin,it’sobviousthatyoushouldbethebest.Orisit?MichaelPorterhasanameforthissyndrome.Hecallsitcompetitiontobethebest.Itis,hewilltellyou,absolutelythewrongwaytothinkaboutcompetition.Ifyoustartoutwiththisflawedideaaboutcompetition,itwillleadyouinevitablytoaflawedstrategy,andthatwillleadtomediocreperformance.Inthevastmajorityofbusinesses,thereissimplynosuchthingas“thebest”.Thus,amajorflawofcompetitiontobethebestisthatiftheorganizationsetsouttobethebest,itsetsitselfanimpossiblegoal.Insteadofcompetingtobethebest,companiescan–andshould–competetobeunique.Thisconceptisallaboutvalue.It’saboutuniquenessofthevalueyoucreateandhowyoucreateit.Isaboutthestruggleforprofits,thetug-of-waroverwhogetstocapturethevalueintheindustrycreates.Competitiveadvantageisnotabouttrouncingrivals;it’saboutcreatingsuperiorvalue.Ifyouhavearealcompetitiveadvantage,itmeansthatcomparedwithrivals,youoperateatlowercost,commandapremiumprice,orboth.Thesearetheonlywaysthatonecompanycanoutperformanother.Ifstrategyistohaveanyrealmeaningatall,itmustlinkdirectlytoyourcompany’sfinancialperformance.Anythingshortofthatisjusttalk.

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Therefore,acompletedefinitionofcompetitiveadvantageis:Adifferenceinrelativepriceorrelativecoststhatarisebecauseofdifferencesintheactivitiesbeingperformed.Wheneveracompanyhasachievedcompetitiveadvantage,theremustbedifferencesinactivities.Butthosedifferencescantaketwodistinctforms.Acompanycanbebetteratperformingthesameconfigurationofactivities,oritcanchooseadifferentconfigurationofactivities.Bynow,yourecognizethatthefirstapproachiscompetitiontobethebest.Porterusesthephraseoperationaleffectivenesstorefertoacompany’sabilitytoperformsimilaractivitiesbetterthanitsrivals.Mostmanagersusetheterm“bestpractice”or“execution”.Whatevertermyoupreferwe’retalkingaboutamultitudeofpracticesthatallowsacompanytogetmoreoutoftheresourcesituses.Theimportantthingisnottoconfuseoperationalefficiencywithstrategy.Simplyimprovingoperationaleffectivenessdoesnotprovidearobustcompetitiveadvantagebecauserarelyare“bestpractice”advantagessustainable.Onceacompanyestablishesanewbestpractice,itsrivaltendstocopyquickly.Thistreadmillofimitationissometimescalledhyper-competition.Operationalefficiencyanddisciplinedexecutionarenecessary,butnotsufficienttocreateasustainablecompetitiveadvantage.Nocompanycanaffordsloppyexecution.Inefficiencycanoverwhelmeventhemostdistinctiveandpotentiallyvaluablestrategies.Butbettingthatyoucanachievecompetitiveadvantage–asustainabledifferenceinpriceorcost–byperformingthesameactivitiesasyourrivalsisabetthatyouwillprobablylose.Porter’sfivetestsofeverygoodstrategy:

1. Adistinctivevalueproposition2. Atailoredvaluechain3. Trade-offsdifferentfromrivals4. Fitacrossthevaluechain5. Continuityovertime

CreatingValueChoosingtheparticularkindofvalueyouwillofferyourcustomersisthecoreofcompetingtobeunique.Butrecallthedefinitionofcompetitiveadvantage:adifferenceinrelativepriceorrelativecoststhatarisebecauseofdifferencesintheactivitiesbeingperformed.Yourvaluechainmustbespecificallytailoredtodeliveryourvalueproposition.Avaluepropositionthatcanbeeffectivelydeliveredwithoutatailoredvaluechainwillnotproducesustainablecompetitiveedge.

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Strategymeansdeliberatelychoosingadifferentsetofactivitiestodeliverauniquemixofvalue.Thevaluepropositionistheelementofstrategythatlooksoutwardcustomers,atthedemand-sideofthebusiness.Thevaluechainfocusesinternallyonoperations.Strategyisfundamentallyintegrative,bringingthedemandandsupplysidestogether.Ifyou’retryingtodescribeastrategy,thevaluepropositionisanaturalplacetobegin.It’sintuitivetothinkofstrategyintermsofthemixofbenefitsaimedatmeetingthecustomer’sneeds.Butthesecondtestofstrategyisoftenoverlookedbecauseitisnotintuitiveatall.Adistinctivevaluepropositionwillnottranslateintomeaningfulstrategyunlessthesetofactivitiestodeliveritisdifferentfromtheactivitiesperformedbyrivals.Theessenceofstrategyandcompetitiveadvantageliesintheactivities,inchoosingtodoactivitiesdifferentlyortoperformdifferentactivitiesfromthoseofrivals.TheThreeCoreStrategyPlatformsFundamentally,therearethreegenericstrategies:focus,differentiation,costleadership.Eachofthesereflectsthemostbasiclevelofconsistencythateveryeffectivestrategymusthave.Focusreferstothebreadthornarrownessofthecustomersandneedsacompanyservice.Differentiationallowsthecompanytocommandapremiumprice.Costleadershipallowsyoutocompetebyofferingalowrelativeprice.Thesebroadcharacterizationsofstrategytypescapturethecoredimensionsofstrategicchoicerelevantinanyindustry.LimitsAreEssentialChoicesinthevaluepropositionthatlimitwhatthecompanywilldoareessentialtostrategybecausetheycreatetheopportunitytotailoractivitiesinawaythatbestdeliversthatkindofvalue.Tailoringispossibleonlyiftherearelimits,onlyifyouarenottryingtobeallthingstoallpeople.Ifthereisoneimportanttakeawaymessage,itisthatstrategyrequireschoice.Competitiveadvantagedependsonmakingchoicesthataredifferentfromthoseofrivals,onmakingtrade-offs.ThisisPorter’sthirdtest.Trade-offsplaysuchacriticalrolethatitisnoexaggerationtocallthemthestrategylinchpin.Theyholdastrategytogetherastheycontributetocreatingandsustainingcompetitiveedge.Acoreelementineffectivestrategyisdecidingwhattosay“no”to.Trade-offsmakechoicesaboutwhatnottodoasimportantaschoicesofwhattodo.Decidingwhichneedsyouwillserveandwhichproductstoofferisabsolutelykeytodevelopingastrategy.Butitisjustasimportanttodecidewhichneedsyouwillnotserve,andwhichproducts,features,orservicesyouwon’toffer.Andthencomesthehardpart–stickingtothosedecisions.

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ThefourthtestofstrategyissomethingthatPortercalls“fit.”Ithastodowithhowtheactivitiesinthevaluechainrelatetooneanother.Thisaspectofstrategyhighlightsyetanotherpopularmisconception,thatcompetitivesuccesscanbeexplainedbyonecorecompetence,theonethingyoudoreallywell.Thefallacyhereisthatgoodstrategiesdon’trelyonjustonething,onmakingonechoice.Nordotheytypicallyresultfromevenaseriesofchoices.Goodstrategiesdependontheconnectionamongmanythings,onmakinginterdependentchoices.Fitmeansthatthevalueorcostofoneactivityisaffectedbythewayotheractivitiesareperformed.Thefirsttypeoffitisbasicconsistency,whereeachactivityisalignedwiththecompany’svaluepropositionandeachcontributesincrementallytoitsdominantthemes.Whenactivitiesareinconsistent,theycanceleachotherout.Asecondtypeoffitoccurswhenactivitiescomplementorreinforceeachother.Thisisrealsynergy,wherethevalueofeachactivityisraisedbytheother.Thethirdtypeoffitissubstitution.Hereperformingoneactivitymakesitpossibletoeliminateanother.Thefifthandfinaltest:ContinuityOverTime.Torecap:thefirsttwotests–auniquevaluepropositionandatailoredvaluechain–arethecoreofstrategy.Trade-offs,thethirdtestistheeconomiclinchpin.Theymakedifferencesinpriceandcostpossibleandsustainable.Thefourthtest,fit,istheamplifier,enhancingthecostandpricedifferencesthataretheessenceofcompetitiveadvantage,andmakingitevenharderforrivalstocopythestrategy.Continuityistheenabler.Allotherelementsofstrategy–tailoring,trade-offs,fit–taketimetodevelop.Withoutcontinuity,organizationsareunlikelytodevelopcompetitiveadvantageinthefirstplace.

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TenPracticalImplications1. Vyingtobethebestisanintuitivebutself-destructiveapproachtocompetition.2. Thereisnohonorinsizeorgrowthifthoseareprofitless.Competitionisabout

profits,notmarketshare.3. Competitiveadvantageisnotaboutbeatingrivals;it’saboutcreatingunique

valueforcustomers.Ifyouhaveacompetitiveadvantage,itwillshowuponyourP&L.

4. Adistinctivevaluepropositionisessentialforstrategy.Butstrategyismorethanmarketing.Ifyourvaluepropositiondoesn’trequireaspecificallytailoredvaluechaintodeliverit,itwillhavenostrategicrelevance.

5. Don’tfeelyouhaveto“delight”everypossiblecustomeroutthere.Thesignofagoodstrategyisthatitdeliberatelymakessomecustomersunhappy.

6. Nostrategyismeaningfulunlessitmakesclearwhattheorganizationwillnotdo.Makingtrade-offsisthelinchpinthatmakescompetitiveadvantagepossibleandsustainable.

7. Don’toverestimateorunderestimatetheimportanceofgoodexecution.It’sunlikelytobeasourceofsustainableadvantage,butwithoutiteventhemostbrilliantstrategywillfailtoproducesuperiorperformance.

8. Goodstrategiesdependonmanychoices,notone,andtheconnectionsamongthem.Acorecompetencealonewillrarelyproduceasustainablecompetitiveadvantage.

9. Flexibilityinthefaceofuncertaintymaysoundlikeagoodidea,butitmeansthatyourorganizationwillneverstandforanythingorbecomegoodatanything.Toomuchchangecanbejustasdisastrousforstrategyastoolittle.

10. Committingtoastrategydoesnotrequireheroicpredictionsaboutthefuture.Makingacommitmentactuallyimprovesyourabilitytoinnovateandadapttoturbulenceandpreparetheorganizationforthefuture.