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Michael Porter, Competitive Advantage (1985)Michael Porter, Competitive Advantage (1985)


American Harvard Business School professor and leading expert on strategy and the competitive advantage of companies and countries (pictured right).

His reputation is based on this book and two others:

  • Competitive Strategy (1980), which introduced his five forces affecting industry profitability.


See also...

Michael Porter in the Management Gurus section. 


Book summary


What increases profits?


1. Industry attractiveness

The profitability and competitiveness of the company’s industry.

These are determined by the five industry forces, discussed by Porter in his previous book, Competitive Strategy (1980):Michael Porter, Competitive Advantage (1985)

  • likelihood of new entrants (into the industry).
  • intensity of rivalry between competitors.
  • bargaining power of customers.
  • bargaining power of suppliers.
  • threat of substitutes (e.g. trains in the car industry).


For more detail see Industry analysis in the Management Topics section


2. Sustainable competitive advantage

Continually providing better value to customers than competitors through:

  • generic strategies (see below)
  • maximizing value to customers at each stage of the company’s value chain (see below).

Michael Porter, Competitive Advantage (1985)


Generic strategies


1. Cost leadership

Being the lowest cost (and price) producer in the industry.


2. Differentiation

Providing customers with something better and different - for example:

  • quality.
  • image.
  • innovation.


3. Focus (or segmentation)

  • cost focus - being the lowest cost (and price) product to a particular market segment.
  • cost differentiation - selling a differentiated product to a particular market segment.


Why is being  “stuck in the middle” bad?Michael Porter, Competitive Advantage (1985)

This means having a strategy that isn't focused on one of the generic strategies outlined above.

An organization will usually fail, if this happens, because the high costs of differentiation mean that...

A firm can normally only achieve either cost leadership or differentiation.

But there are three situations where they can be achieved simultaneously:


a) poor performance of competitors 

(because they are stuck in the middle).


b) a firm’s cost advantage resulting from:

  • its large market share (so reducing the costs of differentiation as a proportion of sales) , or 
  • the exploitation of exclusive relationships with firms from other industries.


c) a major innovation

(that only the firm possesses).


The value chain

Michael Porter, Competitive Advantage (1985)

Successful companies maximize value to customers at each stage of the company’s “value chain”:


1. Inbound logistics

The receipt, storage and distribution of supplies (or inputs) required for operations.


2. Operations

Converting inputs into the final product.


3. Outbound logistics

The collection, storage and distribution of products to buyers.

 Michael Porter, Competitive Advantage (1985)

4. Marketing and sales

Persuading people to buy the products and making it easier for them to do so.


5. Service

After-sales support.


These five primary activities are supported by four support activities:

 Michael Porter, Competitive Advantage (1985)

1. Human resource management

(hiring and motivating employees).


2. Procurement


 Michael Porter, Competitive Advantage (1985)

3. Technology development 

(research and development).


4. Firm infrastructure 

(support managerial functions like finance and planning).

Within each primary and support activity, there are three further activities:


a) direct

(directly creating customer value).


b) indirect

(helping to create customer value)Michael Porter, Competitive Advantage (1985)


c) quality assurance 

(getting quality right).


Key quotes on competitive advantage

Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it.

Industry leadership is not a cause but an effect of competitive advantage


Key quote on business success

Competition is at the core of the success or failure of firms.


 Key quote on customers

Superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price.

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