65 of 71 people found the following review helpful
on December 13, 2011
I have read two of Porter's books - Competitive Strategy and Competitive Advantage. And I have also, sort of, understood them - even though I haven't really internalized them for implementing in my company. The reason was that I did not quite get my mind around the concepts in a comprehensive manner as the ideas are in different books and they are not presented as an integrated whole (and, of course, I read them at different times). For the first time, in this book, the concepts are presented in a very accessible manner and connected in a very coherent manner. The books starts (Part 1) with What is Competition - elucidating on the concept of Competition, The Five Forces, and the Value Chain (CA). Part 2 addresses What is Strategy - in which the concepts of Creating Value; Trade-offs; Fit; and Continuity are discussed. The book is wrapped up with A Short List of Implications where in the author summarizes the takeaways and what they mean for us.
I am in the midst of developing a strategy for my company. These easy to understand frameworks have been extremely useful. In fact, after reading this book, I decided not to hire a consultant who was charging me an exorbitant sum ($4,000/day!) as I think that this book will be more helpful. I highly recommend this book esp if you are trying to get a good grasp of the concepts of Michael Porter. An absolute gem.
13 of 16 people found the following review helpful
Michael Porter is the Harvard Business School's guru of strategy. He became a leading strategy guru by asking big questions, like 'Why are some companies more profitable than others?,' as well as the same question about industries and some countries. However, the usefulness of his ideas has been limited by the fact that they have not been summarized and sequenced into a single source. Author Joan Magretta brings not only her own credible credentials to this summary of Porter's strategy work, but has also had him review each chapter with her.
The key to competitive success, per Porter, lies in an organization's ability to create unique value. Competing to be unique is accomplished against a specific, relevant set of rivals (the industry). The company's relative position within its industry determines how its value will be created and what kind of value that will be.
A good competitive strategy will result in sustainably superior performance. 'Being #1 or #2 in and industry' (Welch, at G.E.), 'making key acquisitions,' 'doubling the number served (for a non-profit), and 'Don't be evil' (Google) do not tell how an organization will outperform the competition. Nor do they tell one where to compete.
With everyone chasing the same customer (the result when everyone's strategy is simply 'to be the best') every sale is contested, and price competition is the ultimate outcome. As for being #1 or #2, in many industries scale economies are exhausted at a relatively small market share. (G.M. was the world's largest auto manufacturer, and went bankrupt; BMW, much smaller, has earned superior returns vs. the industry.) Overpriced M&A, over-extension into all market segments, and price-cutting to gain market share can be disastrous. Most industries have multiple scale curves, each based on serving different markets. Competing to be unique, however, does not require one's rivals to fail; further, unlike sports, every company can choose the 'game' that it will compete in.
Competition is not just a direct contest between rivals - companies also are struggling for profits with their customers, suppliers, substitutes, and potential rivals. These 'five forces' determine profitability, and that industry structure, once past its emergent phase, is stable in the short-term but can change - eg. the emergence of Wal-Mart. If an industry doesn't create much value for its customers, prices will barely cover costs; on the other hand, industries can create lots of value for customers while the companies earn little. Porter also emphasizes that industry structure should be analyzed from an incumbent's perspective, and recognize entry barriers for new entrants.
Customers tend to be more price sensitive when they're buying an undifferentiated, expensive vs. other costs or income, and inconsequential to their own performance. Similarly with suppliers. Both customers and suppliers are more powerful when they are large and concentrated vs. fragmented, there are no short-term alternatives, switching costs and/or differentiation work in their favor, they can credibly threaten to vertically integrate into producing the industry's product itself.
Entry barriers can derive from scale economics, customer switching costs, network effects (eg. large suppliers with stability and good reputation - IBM; network size - Facebook), large required capital investments, proprietary technology/access to locked up distribution channels, government restrictions (eg. taxi license limits), likely incumbent retaliation (greater in slow growth and/or high fixed cost situations). Price competition is greater with undifferentiated products, high fixed and low marginal costs, perishable products. Other factors may be relevant, but are not structural - eg. government regulation, technology (eg. Internet - facilitated shopping around), complements (eg. availability of computer software). Growth might put suppliers into the driver's seat.
Apple having its own operating system avoids Microsoft's supplier power as well as providing differentiation; creating distinctive products limits buyer power; easing switching costs reduces rival power. Pacar competes for owner-operators, not fleet operators - thus, providing roadside assistance, customer features.
Profitability within an industry is determined by the firm's sequence of activities (value chain). ROIC is the appropriate measure. Improving operational effectiveness is an ongoing challenge, but it doesn't always lead to differentiation. Doing so requires a distinctive value proposition such as SWA, involving choosing customers and channels, customer needs to emphasize, price, and method of accomplishment. If you're trying to serve the same customers, meet the same needs, and sell at the same price - per Porter, you don't have a strategy.
Don't feel you have to delight every possible customer. Good execution is unlikely to be a source of sustainable advantage, but without it the best strategy will not provide superior performance. A good strategy makes clear what the organization won't do.
Sysco developed private labels to counteract the power of suppliers, added IT services to fend off small competitors.
Porter's points, though excellent, are not infallible. Intel, the dominant force in high-powered PC CPUs, is now likely to invade the market for mobile devices now dominated by ARM and its low-power chips. ARM, on the other hand, is seen likely to invade Intel's market. Why - the increasing convergence and overlap of the two markets.
Overall, the book is very readable, useful, and important.
2 of 2 people found the following review helpful
on April 28, 2012
Once again Joan Magretta produces a masterful synthesis of complex business ideas (her first being What Management Is). I'm well aware of Michael Porter's contributions to business thinking but I've been hesitant to read his work directly because it seemed so academic and specialized. But in this book, Michael Porter's ideas are laid out logically and explained clearly, with plenty of examples to support the ideas. A major key to understanding Porter is mastering the definitions of key words or phrases, such as "value proposition", "value chain", or even "strategy". Sometimes it's easy to recognize jargon but sometimes not, so you can be easily be confused or led down the wrong path if you're not paying attention closely. Magretta helps by repeating the definitions at key times to reinforce the ideas and ensure you don't get lost (plus there's a handy glossary at the back) and describes how to analyze or implement them step-by-step. It's so well written that I finished in a few days but I did have lots of questions, such as the relationship between business models and strategy or how do his ideas apply to non-profits (the field in which I work) and those were nicely addressed in the closing FAQ interview. If there are any problems, it's in the Kindle edition. The text and diagrams work out better than most Kindle ebooks (although the charts are at their minimum size limit; larger or zoomability would have been nice) but somehow the Kindle version reads the FAQ, Glossary, and Notes all as page 185 (even though it's simultaneously presented as Locations 2452-3092). That may not be a problem for most readers, but if you want cite a quotation from the book for a research paper or report, or want to jump to that section by page rather than location, you're dead in the water. This problem obviously lies with the publisher or Amazon, not the author.
1 of 1 people found the following review helpful
on May 10, 2014
As an investment professional I found this book very useful to help identify "quality" companies, stocks that don't just go up and down almost randomly but compound through the years and decades. It's well written, clear and concise and seems to summarize well the apparently dense base material. I recommend reading it with Michael Maubussin's paper on moats - available for free as of writing if you search online.
These are my notes:
Rather than comparing successful business strategy with sports where firms battle it out under precisely defined limits the better analogy is entertainment where to succeed is to find an audience that suits the firms capabilities and to develop interlocking talents to cement market share. There is a need for creativity just as much as operating effectiveness in seeking a safe haven from the five forces of competitiveness; that of customer, supplier, existing competitor, new entrant and substitution. Good strategy creates a secure enough position to capture a large part of the value created by the chain from suppliers - which includes employees - to customers.
Profitability and not simple market share is the measure of firm performance and profitability is best judged by long term ROIC. A good company competes to be unique rather than the best; its focus is on innovation and not imitation. Operating effectiveness (OE) is of course important – a minimum hurdle to reach – but a firm’s ambitions should have more nuance than that. OE is how well a company does the same activities as others while its strategic positioning is how its activities differ from others.
Absent a creative strategy to navigate the five forces return on capital converges to cost of capital, that is a business creates no economic value.
The structure of the five forces within an industry is much more important for profitability than its growth rate or outlook and is surprisingly stable over time. A company's ROIC may be part handed down from the industry group but a niche can still be carved in unpromising sectors, for example Zara in clothes retailing, and sometimes more than a niche like Wal-Mart.
A negative net working capital arrangement that reduces assets invested and so increases ROIC is often a marker for a strong position within the five forces.
Strategy can be made unique and hard to copy by consciously making tradeoffs. Tradeoffs - giving up on one or more sectors of the total market - are a marker for having an effective strategy. Tradeoffs make differentiation and specialization of company activities possible. The alternative is trying to straddle two or more needs at once - having it both ways - with an corresponding loss of efficiency. Clarity over what the firm doesn't do is just as important as what it does do.
Good strategy makes interdependent choices that reinforce each other to form an interlocking whole stronger that any part on its own; it compounds and amplifies, making it very difficult for competitors to copy this complex web of activities.
Continuity is the enabler of good strategy. It takes time to build a strong activities web, brand and relationships; it may take years for the right choices to emerge. Long term vision is essential to effect strategy and in fact makes the need when it arises for real and not unnecessary change easier to recognize. The ability to accurately predict the future is not necessary but positioning to ride broad and enduring industry waves is helpful. The pursuit of too much flexibility can be an evasion from making important strategic choices and can lead to mediocrity. The pressure from public markets to perform in the short term, make hasty acquisitions and conform with competitors can be distracting and ultimately destructive of value.
Purely generic activities can be safely outsourced outside the company but giving up activities that can be tailored to the overall strategy reduces the possibility of uniqueness.
Customers are more likely to pay up for a company's products if they are not a large share of their total budget and if they are unique and central to their own needs
A sustainable relative price or relative cost advantage over its peers within a market subset is all a company needs to flourish.