Understanding Michael Porter by Joan Magretta

I finished this book on March 1. I recommend this book 8/10.

Why you should read this book:

Having read one of Michael Porter's books, I have to say that this book did a better job helping me in drawing up a new strategy for a new team at Autodesk.

Get your copy here.

🚀 The book in three sentences

1. The Five Forces are your weather forecast. Find your value proposition and make a detailed value chain.

2. Be unique. Be clear about what you will not do.

3. Have the team help develop the details. Keep reminding them of the strategy, and let the strategy develop over time.

📝 My notes and thoughts

• P31. Competing to be unique is unlike warfare in that one company's success does not require its rivals to fail. It is unlike competition in sports because every company can choose to invent its own game. A better analog than war or sports might be the performing arts. There can be many good singers or actors—each outstanding and successful in a distinctive way. Each finds and creates an audience. The more good performers there are, the more audiences grow, and the art flourishes. This kind of value creation is the essence of positive-sum competition. While zero-sum competition is rightly depicted as a race to the bottom, positive-sum competition produces better outcomes. To be sure, not every company will succeed. Competition will weed out the underperformers. But companies that do a good job can earn sustainable returns because they create more value; nonprofit organizations can do more good because they meet needs more effectively and efficiently. And customers can get real choice in how their needs are met. Competing to be the best feeds in imitation. Competing to be unique thrives on innovation.

• P59. Paccar has developed a positioning within this difficult industry where the forces are the weakest. Its target customer is the individual owner-operator, the guy whose truck is his home away from home. This customer will pay more for the status conferred by Paccar's Kenworth and Peterbilt brands and for the ability to add a slew of custom features, such as a luxurious sleeper cabin or plush leather seats. Paccar's made-to-order products come with a number of accompanying services geared to make the owner-operator more successful. For example, Paccar's roadside assistance program limits downtime, a key to the owner economics. In an industry marked by price competition, Paccar is able to charge a 10 percent price premium. Paccar doesn't try to compete by being the "best" truck maker in the industry. If they did, it would go after the same customers with the same products. It would get caught up in the industry's price competition, intensifying rivalry, which, in turn, would cause further deterioration in industry structure. The lesson here is relevant to many companies in many industries: by your own choices in how you compete, you can easily make a bad situation worse. Competing to be unique, meeting different needs or serving different customers, lets Paccar run a different race. The forces affecting its prices and costs are more benign. "Strategy," Porter writes, "can be viewed as building defenses against the competitive forces or finding a position in the industry where the forces are weakest." As Paccar illustrates, good strategies are like shelters in a storm. Five forces analysis will give you a weather forecast.

• P73. We now have a concise, concrete definition of competitive advantage: superior performance resulting from sustainably higher prices, lower costs, or both. But we have to peel one final layer of the onion to arrive at what I'll call the managerially relevant sources of competitive advantage—the things that managers can control. Ultimately, all cost or price differences between rivals arise from the hundreds of activities that companies perform as they compete. We need to slow down here for a minute because this is really important and because this language is not intuitive for most managers. Since I'm going to be referring to activities and activity systems a lot, let's be clear about the definition. Activities are discrete economic functions or processes, such as managing a supply chain, operating a sales force, developing products, or delivering them to the customer. An activity is usually a mix of people, technology, fixed assets, sometimes working capital, and various types of information. Managers tend to think in terms of functional areas such as marketing or logistics because that is how their own expertise or organizational affiliation is defined. That's too broad for strategy. To understand competitive advantage, it is critical to zoom in on activities that are narrower than traditional functions. Alternatively, managers think in terms of skills, strengths, or competencies (what the company is good at), but that's too abstract and often too broad as well. To think clearly about actions you can take as a manager to impact prices and costs, you need to get down to the activity level where "what the company is good at" gets embodied in specific activities the company performs.

• P75. Key Step for a Value Chain Analysis.

• P90. Competitive advantage is not about beating rivals; it's about creating superior value and about driving a wider wedge than rivals between buyer value and cost.

• P96. The Value Proposition answers three questions:

  • Which customers?

    • What end users?

    • What channels?

  • Which needs?

    • Which products?

    • Which features?

    • Which services?

  • What relative price?

    • Premium?

    • Discount?

• P106. In most businesses, there are many different possible configurations of the value proposition triangle. Some companies serve virtually all customers in the market but only meet a specific need or cluster of needs. Other companies serve a more focused customer base but aim to meet more of those customers' needs. Some companies deliver higher value at a premium price. Others, enabled by their efficiency, offer a low relative price. The first test of a strategy is whether your value proposition is different from your rivals. If you are trying to serve the same customer and meet the same needs and sell at the same relative price, then by Porter's definition, you don't have a strategy. You're competing to be the best.

• P114. Can you be differentiated and low-cost at the same time? Early in his career, Porter identified a set of generic strategies—focus, differentiation, and cost leadership—that quickly became one of the most widely used tools for thinking about key strategic choices. Each of the three reflects the most basic level of consistency that every effective strategy must have. Focus refers to the breadth or narrowness of the customers and the needs a company serves. Differentiation allows a company to command a premium price. These broad characterizations of strategy types capture the fundamental dimensions of strategic choice relevant in any industry. At the time, Porter described a common strategic mistake, which came to be known as getting stuck in the middle. This happens when a company tries to be all things to all customers and is outflanked by cost leaders on one side, who meet "just enough" of their customers' needs, and by differentiators on the other side, who do a better job of satisfying customers who "want more" (of some particular attribute they value).

• P118. Only a value proposition that requires a tailored value chain to deliver it can serve as the basis for a robust strategy. This is the first line of defense against rivals. Strategy, then, defines a way of competing, reflected in a set of activities that delivers unique value to a particular set of users or for a particular set of customers, or both. In most industries, there can be many strategically relevant value propositions. This simply reflects that activity configurations are often required to meet those needs most effectively.

• P120. Great chapter—re-read.

• P139. Executives often resist making trade-offs for fear they will lose some customers. The irony is that unless they make trade-offs and deliberately choose not to serve all customers and needs, then they are unlikely to do a good job of serving any customers and needs. Clarity about what you won't do, then, is the best way to succeed at what you do choose to do. It is only by being deliberately unresponsive to some needs, by embracing strategic trade-offs, that companies can be genuinely responsive to other needs.

• P140. Make sure you write down what you will not do in your strategy.

• P150. Mapping your activity system.

• P157. Map out the core value drivers and ensure focus solutions aligns. Also, think of the whole system.

• P160. The five tests of a good strategy:

  • A unique value proposition. Are you offering distinctive value to a chosen set of customers at the right relative price?

  • A tailored value chain. Is the best set of activities to deliver your value proposition different from the activities performed by rivals?

  • Trade-offs are different from rivals. Are you clear about what you won't do so that you can deliver your kind of value most efficiently and effectively?

  • Fit across the value chain. Is the value of your activities enhanced by the other activities you perform?

  • Continuity over time. Is there enough stability in the core of your strategy to allow your organization to get good at what it does, to foster tailoring, trade-offs, and fit?

• P169. "That is what strategy is all about. It's about a point of view about the future and then making decisions based on that. The worst thing you can do is not have a point of view and not make decisions."

• P176. The steps are:

  • Do some analysis (five forces, value chain, relative cost, and value).

  • Draw an industry map, showing how current players are positioned.

  • Choose an unoccupied position.

• P177. Often, strategies begin with two or three essential choices. Over time, as the strategy becomes clearer, additional choices complement and extend the original ones. Southwest began, as we saw earlier, with three airplanes and the simple value proposition of convenient service at a low price. We also saw how important fast gate turnarounds have been to Southwest's competitive advantage. But that crucially important element was not something Southwest's founders figured out in advance. Early on, CEO Lamar Muse saw an opportunity to provide out-of-state charter service, so he bought a fourth plane. This extra plane also lets Southwest add more flights to its regular routes, thus boosting its convenience. As luck would have it, a federal district court then ruled that Southwest could not fly outside the state of Texas. Suddenly, the fourth plane was a financial burden. Muse sold it, but he really wanted to maintain the enhanced schedule. It would be possible, but only if they kept gate turnarounds to ten minutes. Necessity became the mother of invention. As one Southwest station manager at the time recalls, "Most of us, not having an airline background, had no idea that we couldn't do this, so we just did it."

• P184. Ten Practical Implications:

  • Vying to be the best is an intuitive but self-destructive approach to competition.

  • There is no honor in size or growth if those are profitless. Competition is about profits, not market share.

  • Competitive advantage is not about beating rivals; it's about creating unique value for customers. If you have a competitive advantage, it will show up in your P&L.

  • A distinctive value proposition is essential for strategy. But strategy is more than marketing. If your value proposition doesn't require a specifically tailored value chain to deliver it, it will have no strategy relevance.

  • Don't feel you have to "delight" every possible customer out there. The sign of a good strategy is that it deliberately makes some customers unhappy.

  • No strategy is meaningful unless it makes clear what the organization will not do. Making trade-offs is the linchpin that makes competitive advantage possible and sustainable.

  • Don't overestimate or underestimate the importance of good execution. It's unlikely to be a source of a sustainable advantage, but without it, even the most brilliant strategy will fail to produce superior performance.

  • Good strategies depend on many choices, not one, and on the connections among them. A core competence alone will rarely produce a sustainable competitive advantage.

  • Flexibility in the face of uncertainty may sound like a good idea, but it means that your organization will never stand for anything or become good at anything. Too much change can be just as disastrous for strategy as too little.

  • Committing to a strategy does not require heroic predictions about the future. Making that commitment actually improves your ability to innovate and to adapt to turbulence.

• P197. A disruptive technology is not any new technology. Many new technologies are not disruptive. Nor is it any big technological leap, because many big leaps are not disruptive. A disruptive technology is one that invalidates value chain configurations and product configurations in ways that allow one company to leap ahead of another and/or make it hard for incumbents to match or respond because of the existing assets they have. So a disruptive technology is one that would invalidate important competitive advantages. The Internet offers a classic case. It was disruptive when the mechanism for delivering information was fundamental to the product or service, where the business, in essence, was the delivery mechanism. Travel agents, for example, or the record music business. But in other cases, the Internet wasn't disruptive because it was merely one more channel for communicating with customers or suppliers. In those cases, established companies with the best product sets and brands were simply able to incorporate the new technology. It wasn't incompatible or inconsistent with anything they were doing. Two questions will tell you whether you're dealing with a disruptive technology or not. First, to what extent does it invalidate important traditional advantages? Second, to what extent can incumbents embrace the technology without major negative consequences for their business? If you stop and ask those questions, you'll see that true disruptions are not so common. If you look over a decade, for example, at the hundreds of industries that make up the economy, I would guess that less than 5 to 10 percent would be affected by a disruptive technology.

• P207. I think there are a couple of keys to successful strategic planning. One is that you need to bring together the whole team responsible for a particular business, and they need to do the plan together. You can't divide up the work and then try to staple it together at the end. Strategy is about the whole enterprise, not the individual pieces. That's a fundamental principle of good strategy. There's no such thing as a good marketing strategy. There's only a good marketing strategy in the context of the overall strategy. The danger with sending people off to do their own functional plans is that you'll end up with a series of unconnected "best practices," not a coherent strategy. That's why a strategic plan needs to involve the whole management team working together to think about the industry, the competitors, the opportunities, the value chain, and then ultimately make some choices about positioning and direction. Then, the team needs to develop the implications for actions.