Understanding Michael Porter

Unconvering strategic insights from Michael Porter's work

Aug 11, 2022

Porter’s work has completely revolutionized how companies think about strategy for a few decades. While his five forces framework continues to be popular, his other insights seem to have been lost in recent times.

I read Understanding Michael Porter by Joan Magretta, and uncovered the rest of his insights from this wonderful book. Here are my takeaways -

The Most Common Mistakes Companies Make

According to Porter, here are the common mistakes that companies make when executing on their strategy.

Not having a strategy at all

I mentioned this in my previous post on Good Strategy Bad Strategy, but most companies often don’t have a strategy. Even if they do, they often confuse vision/goals with strategy. Reflecting on his experience, Porter mentions that executives think they have a strategy, but in reality, their strategy does not meet any kind of rigorous, economically grounded definition.

Competing to be the best

If there is one takeaway from Porter’s work - it’s that a competitive strategy should not be based on a zero sum game. Often companies try to copy their competitors by going down the same path, thinking that they could achieve better results. This mindset of competing to be the best is a hard race to win and should be avoided.

The real point of competition is not to beat your rivals. It’s not about winning a sale. The point is to earn profits. Competing for profits is more complex.

Confusing Marketing with Strategy

Porter argues that in many companies strategy is built around the value proposition, which is the demand side of the equation. In product teams today, there is a lot of emphasis to build strategy from customers and their needs. But according to Porter — a robust strategy requires a tailored value chain— it’s about the supply side as well, the unique configuration of activities that delivers value.

Strategy links choices on the demand side with the unique choices about the value chain(the supply side). You can’t have competitive advantage without both.

Overestimate strengths in the organization

This mistake is one that I’ve observed in my own experience. There’s often an inward-looking bias in many organizations. “So and so is our strength, and this is what we should build our strategy around”. Porter argues that a real strength for strategy purposes has to be something the company can do better than any of its rivals. And “better” because you are performing different activities than they perform, because you’ve chosen a different configuration than they have.

Measuring company performance by industry metrics

According to Porter - when companies measure progress on the same metrics as the industry, they encourage convergence and undermine strategic uniqueness. If the company is trying to pursue a different positioning, then different metrics will be relevant.

Porter’s Five Forces

Porter’s Five Forces framework is his most popular work. It’s a framework that helps determine the overall industry profitability.
Instead of memorizing the framework, the important takeaway is that there are a limited number of structural forces at work in every industry that systematically impact profitability in a predictable direction.

The Five Forces are -

The intensity of rivalry among existing competitors.
The bargaining power of buyers(the industry’s customers).
The bargaining power of suppliers.
The threat of substitutes.
The threat of new entrants.

The figure below highlights the forces and impact on profitability.

Five Tests Every Good Strategy Must Pass

1) A Distinctive Value Proposition

As mentioned earlier, not having a distinctive value proposition is competing to be best. A company needs to decide where to differentiate when it comes to meeting customers and their needs.

2) A Tailored Value Chain

Porter highlights Value Chain as the crucial strategic advantage that companies can possess. If a value chain is tailored to deliver then it serves the basis for a robust strategy and keeps rivals away.

3) Trade-Offs

Trade-offs are the linchpin that holds a strategy together. It contributes to both creating and sustaining competitive advantage.

Robust strategies typically incorporate multiple trade-offs. The very best have trade-offs at almost every step in the value chain. Maintaining and steepening trade-offs, making them even sharper, is essential to sustaining strategy.

Porter calls out one of the great paradoxes about trade-offs in competition. 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.

The notion that the customer is always right is one of those half-truths that can lead to mediocre performance. Trade-offs explain why it is not true that you should give every customer what he or she wants.

4) Fit

Porter defines the Fit test as one that can amplify the competitive advantage of a strategy by lowering costs or raising customer value.

There are 3 types of Fit —

Consistent - each activity is aligned with the company’s value proposition.
Complementing - multiple activities in the company complement/reinforce each other.
Substitution - performing one activity makes it possible to eliminate another.

5) Continuity

Two quotes from the book on continuity —

“Continuity is the enabler. All the other elements of strategy— tailoring, trade-offs, fit— take time to develop. Without continuity, organizations are unlikely to develop competitive advantage in the first place.”

“Continuity of strategy does not mean that an organization should stand still. As long as there is stability in the core value proposition, there can, and should, be enormous innovation in how it’s delivered.”

How do you get everyone aligned on strategy in an organization?

Having a well prepared strategy is not good enough. It needs to be communicated through the organization.

The purpose of strategy is to align the behavior of everyone in the organization and to help them make good choices when they’re on their own.

And how do you communicate strategy?

Porter says that strategy should be communicated in a concise and memorable way. Really good leaders crystallize the value proposition into something relatively simple.

And finally, Porter is of the opnion that strategy should not only be communicated within the organization but also the customers, the suppliers, and the capital markets. A consistent message can help reinforce the organization’s message and get the advantage of commiting deeply to a well-informed strategy.