Michael Porter (1947- )
American Harvard Business School professor and leading expert on strategy and the competitive advantage of
companies and countries (pictured right).
Successful companies achieve “competitive advantage” (better value than competitors) by
concentrating on one of three “generic strategies”:
1. Cost leadership
Selling to a mass market with lower costs and prices than competitors.
Selling to a mass market at a high price with a product perceived by customers as
unique and superior to competitors.
Selling to a particular customer category (a market segment or
niche e.g.rich or poor).
This segmentation strategy will concentrate on:
- cost leadership (cost focus), or
- differentiation (differentiation focus).
An organization will fail, when it is “stuck in the middle” - having a strategy that isn't
focused on one of the generic strategies outlined above.
Such a company will only make profits if its:
- competitors are also stuck in the middle, or
- industry structure is highly profitable
Causes of a highly profitable industry structure
1. High entry barriers
Deterring new competitors because of your:
- patents (for inventions).
2. Low competitive rivalry
(because of a high industry growth rate, minimizing competition for market share).
3. Low buyer power
(due to a superior product, or a monopoly).
4. Low supplier power
(the company is big relative to the supplier like supermarkets).
5. Little or no threat of substitutes
(due to good value relative to price).
These five factors are now referred to as Porter’s five forces
Competitive analysis is also important which analyses competitors' strengths and weaknesses (so that strengths
can be avoided and weaknesses exploited).
A company must respond to competitors' market signals indicating their strategic intentions.
Porter summarized the book’s message in a 1996 Harvard Business Review article, What Is Strategy? -
“Competitive strategy is about being different”, he said.
Key quote on industry
All five competitive forces jointly determine the intensity of industry competition and profitability.
Key quote on
Competitive strategy involves positioning a business
to maximize the value of the capabilities that distinguish it from its competitors.
(see for more detail Competitive Advantage in
the Business Books section)
Successful companies have “sustainable competitive advantage” (perpetually better value
- a generic strategy (as described in Competitive Strategy)
- maximizing value to customers at each stage of the company’s
The value chain has five primary activities:
1. Inbound logistics
The receipt, storage and distribution of supplies (or inputs) required for operations.
Converting inputs into the final product.
3. Outbound logistics
The collection, storage and distribution of products to buyers.
4. Marketing and sales
Persuading people to buy the products and making it easier for them to do so.
activities are supported by four support activities:
1. Human resource management
Hiring and motivating employees.
3. Technology development
Research and development.
4. Firm infrastructure
Support managerial functions like finance and planning.
Within each primary and secondary activity, there are three further activities:
- direct (directly creating customer value).
- indirect (helping to create value).
- quality assurance (getting quality right).
Key quotes on competitive
Competition is at the core of the success or failure of firms.
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.
Key quote on business
The first fundamental determinant of a firm’s profitability is industry attractiveness.
The Competitive Advantage of Nations
(see for more detail
The Competitive Advantage of Nations in the Business Books section)
A diamond model is used to describe four
interrelated factors which (in addition to chance and government action) will decide whether or not a country
achieves international success in a particular industry:
1. Factor conditions
Relating to factors of production, for example:
- the quality and quantity of labour.
- infrastructure (like transport and education).
2. Demand conditions
The popularity of the industry’s product with customers.
3. Related and supporting industries
The international competitiveness of suppliers and associated industries.
4. Firm strategy, structure and rivalry
The competitiveness of domestic companies that will spur them to improve and compete
Key quotes on
Productivity is the prime determinant in the long run of a nation’s standard of living.
Incentives, effort, perseverance, innovation and especially competition are the source of economic progress in
any nation and the basis for productive, satisfied citizens.