Introduction | The Competitive Advantage by Michael Porter
Michael Porter has created a methodology for thinking about business. The approach will open your eyes and mind to how successful businesses thrive. From the Kebab shop on the corner to Walmart, every successful business seems to slot nicely in this generalizable model that Porter has created. The underlying thesis is that if you want profitability in the long-term you need to understand how to isolate your competitive advantage.
How to create an effective strategy? A Competitive Strategy: Michael Porter’s book takes you behind the scenes of successful enterprises to understand how they thrive. For Porter, the cunning entrepreneur needs to understand the so-called ‘Five Forces’ better than their competition. Strategies can be the opposite of good however.
The tobacco industry has white labels, which create cheaper products at lower prices while the well-known tobacco companies ride the barrier to entry of advertising prowess. Generics are dangerous for any industry according to Porter. In fact, you can actually have industry destruction if a series of decisions are replicated by competitors…somewhat analogous is the copying of music online which has eroded the business model of the record label by making a race to the bottom more palpable. So in essence, you need to make sure that your companies value is not competed away by other firms. However, a leader’s actions impact the industry so they have to balance their competitive advantage and the health of the industry as a whole. Presumably this isn’t always the case. You need buyers at a higher price than the cost of production. Period.
Substitutes are the threat of another product that is better at price or quality is something you need to be constantly aware of. You need to create value for your customers beyond what others do. Another price sensitive industry is the equipment sector, which has eroded resulting in falling demand. In the equipment sector in the 1980s, companies competed away the value they generated. Equipment is more accessible in the oil drilling new entrants more choice of buyers and profits fall. Environmentalists erode the oil industry with supplier manipulation.
It’s industry structure that determines profitability NOT an individual firms value proposition. Therefore, you need to look at the industry structure before considering whether your business is worth pursing otherwise you’ll invest time and energy without a beneficial outcome. Just like the success of a given political parties is not necessarily related to their policies but rather their success is related to the timing of their winning an election and the size of their electoral base.
Price wars are cause by excess capacity price cutting for a competitive advantage. Industry structures are fundamental to both the speed of adjustments of supply and demand and the relationship between capacity initiatives and profitability.
Sustainability is about above average performance for competitive advantage a firm, which makes a profit by positioning itself to make a high rate of return. Harvesting dentists who do a daily deal site deal can end up doing 6 months of business in 6 weeks thereby cannibalizing their entire business.
Types of Competitive Advantage
You can be a cost leader (the cost leadership approach) or you can be differentiators in either the broad target or narrow targeted dynamic. Regardless, you will need to focus: a) cost focus or b) differentiation focus.
The ultimate road to failure is to be “all things to all people” that is the recipe for disaster. Being in the middle ground is truly awful for your future.
What is Competitive Strategy?
Positioning a Company in its competitive environment. Not just marketing only, production distribution, logistics and service. A competitive strategy looks into how the business is positioned.
There are two fundamental questions:
1st, how attractive is the industry? Some industries are much more profitable. You need to know how good the game is.
2nd, who is performing best and why? Look at where they fit in their industry some make a lot more money than others. You need to understand who is superior.
The above is a synopsis of Competitive Advantage by Michael Porter complete with analysis and criticism.