Thursday, May 23, 2013

Understanding Michael Porter

I recently read a very good book on corporate strategy and industry competition.  Joan Magretta's book, Understanding Michael Porter: The Essential Guide to Competition and Strategy is an excellent overview of the famous Harvard professor's views, research, and writings on corporate strategy and understanding why some companies and industries are more profitable than others.

Beyond explaining Porter's 5 Forces and the Value Chain, the author does a very good job of describing 5 tests for a good corporate strategy.

Unique Value Proposition:
The first test is that the strategy should focus on "competing to be unique" rather than "competing to be the best".  The later strategy, as Porter would claim, is not a strategy but simply a self-defeating competition of matching your competitors in a face-to-face battle that ultimately ends up in competing on price and a downward spiral into becoming a commodity.  The best strategies find a way to differentiate themselves from their competition such as targeting a different customer segment, fulfilling a different need, or fulfilling the need in a unique way.

Tailored Value Chain:
The second test of good strategy is that it has more than one "competitive advantage" and actually consists of an integrated set of activities along the value chain that are all consistent with each other and with the strategy.  The value chain activities include how the company does its procurement, product development, marketing, sales, supply chain, and service.

Fit:
The fit test of strategy is ensuring that the set of strategic activities are not only aligned with each other, but preferably self-reinforcing.

Trade-offs:
This may be the least intuitive test, but as Porter says, a good strategy makes clear "what you will not do".  Good strategic activities create trade-offs that make it clear which actions and decisions are not consistent with the strategy.  Having such clear trade-offs makes it easier for management and employees to make decisions on what they should and should not be doing.

Continuity:
Good strategy takes time to develop and cannot be created in its entirety from scratch.  Therefore, consistency and continuity over time is essential to keeping on the path set out by the strategy and allowing the interconnected activities to reinforce each other.

This is obviously a great simplification of the ideas laid out in the book, which also goes into much more breadth as well as depth.  Definitely a good read for anyone interested in business strategy.

WARNING:  I listened to the audiobook which has a very annoying narrator, as you'll see from other reviewer comments, as well.  He has a very distracting habit of inflecting the pitch of his voice upward at the end of each sentence.  It took me a while to block it out and just listen to the content.  For me, I prefer audiobooks to text so that I can listen during my car commute so it was worth the pain, but if you're on the fence about text versus audiobook, you may want to choose the text.

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