Michael Porter - How to Compete


Strategy is the recipe that makes profit. Strategy IS the code for the main loop.

What is my competitor's recipe for success. How does he make money? What steps does he take?

Strategy is executable. It is not a shelf of collected theory.

One chess player will consistently win. Strategy is why he wins.


Definitions

Startups are temporary entities that search for a business model that is profitable, repeatable, scalable and defensible.

Corporate Strategy The business you should be in.

A Business Model How you make money.

A Business Strategy How you compete.

Execution How you deliver on your intent.

The Value Proposition focuses externally on the customer (demand).

The Value Chain focuses internally on operations (supply).

Strategy links choices on both the demand side (marketing) with the choices about the supply side (operational excellence).

Trade-offs are choices that make strategies sustainable because they are not easy to match or to neutralize. Maintaining and steepening trade-offs, making them even sharper, is essential to sustaining strategy.

Operational management improving efficiency and controlling costs within the boundaries set by the business strategy.


Cost + Focus + Unique = Win

A cost leadership business strategy and having a relatively small product portfolio will fare better than companies that compete by product differentiation and have a larger number of products.

First Mover Advantage

In the first mover advantage, a company is able to exploit innovation by learning curve effects or patenting and attains a dominating competitive position compared to companies in countries where environmental regulations were enforced much later.


The Strategic Plan -- The Plan on How to Compete

The fundamental goal of a company is superior long term return on investment.

If your goal is anything but profitability - if it's to be big, or to grow fast, or to become a technology leader - you'll hit problems.

Sound strategy starts with having the right goal.

The company without a strategy is willing to try anything.

Strategy is about making choices, trade-offs; it's about deliberately choosing to be different.

A strategy delineates a territory in which a company seeks to be unique.

The essence of strategy is that you must set limits on what you're trying to accomplish.

Strategy 101 is about choices: You can't be all things to all people.

The essence of strategy is choosing what not to do.

If everybody is competing on the same set of variables, then the standard gets higher but no company gets ahead.

If all you're trying to do is essentially the same thing as your rivals, then it's unlikely that you'll be very successful.

It must be illogical or difficult for rivals to match everything you do, otherwise competition will be mutually destructive.

It's not just a matter of being better at what you do -- it's a matter of being different at what you do.

Fit is Leveraging what is Different to be More Different

The companies that will be the true leaders will be those that don't just optimize within an industry, but that actually reshape and redefine their industry. The important thing is to try to shape the nature of competition, to take control over your own destiny.

Finally, strategy must have continuity. It can't be constantly reinvented.

The underlying principles of strategy are enduring, regardless of technology or the pace of change.

Change brings opportunities. On the other hand, change can be confusing.

The ability to change constantly and effectively is made easier by high-level continuity.

Innovation is the central issue in economic prosperity.

Innovation is an output. It's when something new is implemented that adds value to the organisation.

necessity is the mother of invention.

You have to be productive, and you have to create a very low-cost, efficient place to do business.

There's a fundamental distinction between strategy and operational effectiveness.

In a period of economic downturn, reconnect and recommit to a clear strategy that will distinguish yourself from others.

Unfortunately, I'm an engineer. I'm always thinking about, what's the task and how do I get it done? And some of my tasks are pretty broad, and pretty fuzzy, and pretty funky, but that's the way I think.

The best CEOs I know are teachers, and at the core of what they teach is strategy.

Good leaders need a positive agenda, not just an agenda of dealing with crisis.

The chief strategist of an organization has to be the leader - the CEO.


When does it become necessary to change your competitive strategy?

  1. when the fundamental needs of the customer group shift.
  2. when the particular type of product is no longer distinct.
  3. when the trade-offs are eliminated by new technology or customer changes.

Michael Porter identifies three principles underlying strategy

  1. creating a "unique and valuable market position",
  2. making trade-offs by choosing "what not to do", and
  3. creating "fit" by aligning company activities with one another to support the chosen strategy.


Porter's 3 Generic Strageties

  1. Focus refers to the breadth or narrowness of the customers and their needs
  2. Differentiation allows a company to command a premium price.
  3. Cost Leadership allows a company to offer a lower price or have a higher profit margin

Porter's 3 Generic Strageties

  1. "Focus" (offering a specialized service in a niche market).
  2. "Cost Leadership" (no frills),
  3. "Differentiation" (creating uniquely desirable products and services) and

Differentiation

A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition.

  1. Access to leading scientific research.
  2. Highly skilled and creative product development team.
  3. Strong sales team with the ability to successfully communicate the perceived strengths of the product.
  4. Corporate reputation for quality and innovation.

Cost Leadership

  1. offer products or services at the lowest cost in the industry
  2. Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome.
  3. Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process.
  4. High level of expertise in manufacturing process engineering.
  5. Efficient distribution channels.

Focus

The premise is that the needs of the group can be better serviced by focusing entirely on it.

  1. With a only Single Product, you can know that product inside and out
  2. the unique needs of customers within a niche market
  3. develop uniquely low-cost or well-specified products for that niche market
  4. buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments



Business Model - How do you plan to make money

    Who's your target customer?

    What customer problem or challenge do you solve?

    What value do you deliver?

    How will you reach, acquire, and keep customers?

    How will you define and differentiate your offering?

    How will you generate revenue?

    What's your cost structure?

    What's your profit margin?


Profitable, Repeatable, Scaleable and Defensible

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  How are actions related to goals or outcomes?
  
  There is a link between the action and the outcome. 

  The outcome is thought about in definite terms.
  
  A clear 
     thought out, 
     written, 
     tested 
     logical chain of events 
     that move from start to finish,
     with all the 
        steps, tasks,actions 
        defined and rehearsed
     all resources and knowledge obtained.


----------------

When the situation is obvious, then decisions are easy.
    
Untested decisions that cannot be "Confirmed" by repeatability 
    often lead to disappointing results. 
  
----------------


Michael Porter's Four Corners Model

a predictive tool that helps in determining a competitor's course of action.

Motivation - Drivers

This helps in determining competitor's action by understanding their goals (both strategic and tactical) and their current position vis-\E0-vis their goals. A wide gap between the two could mean the competitor is highly likely to react to any external threat that comes in its way, whereas a narrower gap is likely to produce a defensive strategy. Question to be answered here is: What is it that drives the competitor? These drivers can be at various levels and dimensions and can provide insights into future goals.

Motivation - Management Assumptions

The perceptions and assumptions the competitor has about itself and its industry would shape strategy. This corner includes determining the competitor's perception of its strengths and weaknesses, organization culture and their beliefs about competitor's goals. If the competitor thinks highly of its competition and has a fair sense of industry forces, it is likely to be ready with plans to counter any threats to its position. On the other hand, a competitor who has a misplaced understanding of industry forces is not very likely to respond to a potential attack. Question to be answered here is: What are competitor's assumption about the industry, the competition and its own capabilities?

Actions - Strategy

A competitor's strategy determines how it competes in the market. However, there could be a difference between the company's intended strategy (as stated in the annual report and interviews) and its realized strategy (as is evident in its acquisitions, new product development, etc.). It is therefore important here to determine the competitor's realized strategy and how they are actually performing. If current strategy is yielding satisfactory results, it is safe to assume that the competitor is likely to continue to operate in the same way. Questions to be answered here are: What is the competitor actually doing and how successful is it in implementing its current strategy?

Actions - Capabilities

This looks at a competitor's inherent ability to initiate or respond to external forces. Though it might have the motivation and the drive to initiate a strategic action, its effectiveness is dependent on its capabilities. Its strengths will also determine how the competitor is likely to respond to an external threat. An organization with an extensive distribution network is likely to initiate an attack through its channel, whereas a company with strong financials is likely to counter attack through price drops. The questions to be answered here are: What are the strengths and weaknesses of the competitor? Which areas is the competitor strong in?


http://www.innovationexcellence.com/blog/2011/12/29/michael-porter-on-strategic-innovation-creating-tomorrows-advantages/

AS WE ENTER the twenty-first century, there is a pressing need for clear strategies. Because unless companies have a clear vision about how they are going to be distinctly different and unique, offering something different than their rivals to some different group of customers, they are going to get eaten alive by the intensity of competition.

There was a time when markets were forgiving, when there weren't that many rivals and companies could drift along with ‘me-too' strategies. But now ‘me-too' strategies are punished quickly and mercilessly. So the stakes of having a clear strategy are higher.

Three Principles of Competitive Strategy

The first principle is that if everybody is competing on the same set of variables, then the standard gets higher but no company gets ahead. And getting ahead-then staying ahead-is the basis of strategy: creating a competitive advantage. Strategy is about setting yourself apart from the competition. It's not just a matter of being better at what you do-it's a matter of being different at what you do.

Increasingly, the companies that will be the true leaders will be those that don't just optimize within an industry, but that actually reshape and redefine their industry. The important thing is to try to shape the nature of competition, to take control over your own destiny.

The second principle is that a good strategy makes the company different. It gives the company a unique position. And a unique position involves the delivery of a particular mix of value to some array of customers which represents a subset of the industry. The fundamental truth in strategy is that a company simply cannot be all things to all people and do a very good job of it. Strategy requires choices. You have to decide what particular kind of value you want to deliver to whom.

Third, it's not good enough just to be different. You've got to be different in ways that involve trade-offs with other ways of being different. In other words, if you want to serve a particular target customer group with a particular definition of value, this must be inconsistent with delivering other types of value to other customers. If not, the position is easy to imitate or replicate. So there must be trade-offs between what your competitors do and what your company does. If there are no trade-offs, then everything can be easily and cheaply imitated. And that leads, of course, to a mutually destructive battle. Companies end up competing for the same set of customers using the same set of inducements. This is usually a loser's game.

The trouble is that companies hate making choices, because doing so always looks dangerous and limiting. They always want the best of all worlds. It's psychologically risky to narrow your product range, to narrow the range of value you are delivering or to narrow your distribution. And this unwillingness to make choices is one of the biggest obstacles to creating a winning strategy.

RG: When does it become necessary to change your competitive strategy?

It becomes necessary when the fundamental needs of the customer group shift. Or when the particular type of product is no longer distinct. A strategy must also change when the trade-offs are eliminated by new technology or customer changes.

Changes of this magnitude don't happen very often. Strategy should rest on dimensions that are not like the difference between a short hemline and a long hemline. You don't want to base the success of your company on a particular definition of value that is transient. Instead, it should be things like intensive after-sales support, the sheer durability of the product, the ruggedness of the product in the face of abuse out in the field. These more enduring sources of value are the basis of really great strategies.

The Importance of Strategic Innovation

As I stress in my book The Competitive Advantage of Nations, the ability to sustain an advantage from cheap labor or even from economies of scale - these are the old paradigms. These paradigms are being superseded. Today, the only way to have an advantage is through innovation. But this innovation has to involve a consistent strategic direction. There has to be a strategic vision within which you are

innovating. A company has to have something distinctive at the end of the day that it is reinforcing.

To me, innovation means offering things in different ways, creating new combinations. Innovation doesn't mean small, incremental improvements - these are just part of being a dynamic organization. Innovation is about finding new ways of combining things generally.

The essential core of strategy is cross-functional or cross-activity integration. It's not the ability to come up with a better production process or the ability to come up with a great ad. It's the capacity to link and integrate activities across the whole value chain and to achieve complementarities across many activities. It's where the way you do one thing allows you to do something else better.

Consider Wal-Mart's strategy. Its success was based on a whole series of integrated activities. It was location plus warehousing, plus MIS, plus store manager autonomy, plus, plus, plus. So for K-Mart to match Wal-Mart, it would have to match a lot of what Wal-Mart does. It's like a recipe: if you leave out one ingredient, the cake can collapse. To have a sustainable advantage, a company has to integrate across many activities to create a unique positioning involving trade-offs with rivals. It must be illogical or difficult for rivals to match everything you do, otherwise competition will be mutually destructive.

So if the essence of strategy is cross-functional, cross-activity integration, then strategy shouldn't only be the province of the leader. I believe that strategy should be developed in a multifunctional team, involving the leader and the people who are responsible for the principal activities in the business. And that strategy must be the joint product of those people. It's a great mistake to try to subdivide strategic planning into pieces and then attempt to put the pieces back together. Ultimately, the essential issue is how to integrate across the pieces.

Globalization and Innovation Clusters

The first impact of globalization was to diminish the impact of location, by allowing international companies to gain an advantage over companies that were still stuck in a domestic orientation. So, in the first phase of globalization it was globalness itself which provided the advantage. That is, the capacity of a company to martial and mobilize inputs and assets across borders.

We are entering a new phase which is more counterintuitive, because now globalness is assumed. Now, a company must source inputs from the lowest-cost location. It must source capital internationally, not locally. It must locate plants in low-labor-cost nations if it has labor-intensive activities.

The presence of so many global markets and companies has essentially nullified the advantage of globalness per se. Anything a company can access from a distance is no longer a competitive advantage, because now everybody can access it.

This new phase of globalization is paradoxically putting a greater and greater premium on what I call the 'home base' - the unique critical mass of skill, expertise, suppliers and local institutions that makes certain locations the innovation centers in a particular business. There are numerous examples of industry clusters that have become the innovation centers in their fields. There's Silicon Valley in microelectronics, Hollywood in the entertainment business, LosAngeles in multimedia.

A company's odds of being successful in any given field are dramatically improved by location. The odds of becoming a world-class software company are much higher if you are located in the United States. The Japanese are still nowhere in software, although their government has poured millions into developing the industry. So whereas it used to be that the scale of the firm was important, now it is increasingly the scale of the innovation cluster - the network, the infrastructure - that is important. A given firm's scale can be smaller if there are a lot of good suppliers around, if there are a lot of good supporting companies around.

In the future, nations are going to be increasingly competing for these home bases, because they are the sources of wealth and high wages. That's where the development and innovation capabilities in any given business are going to be concentrated.

Technology vs Innovation

Fundamental shifts in technology can have an incredible impact on the importance of geographical location. My perspective is that, as changes in technology diminish the importance of certain aspects of location, these aspects become nullified as competitive advantages. So, in some sense, what happens is that new technology sweeps away potential advantages and therefore the residual advantages get more and more important.

It used to be that if you had access to capital at home, you had a competitive advantage. But now having a lot of capital at home is no longer an advantage, because technology and market developments have allowed companies outside of the country to get access to that capital.

It's the same thing if we can have employees working at home and not needing to be at the company. It means that the things those people do will no longer be an advantage, because companies anywhere in the United States can tap in to people working at home through the same technology.

There is a constant process by which technology is nullifying traditional advantages of location. And, as it does that, it's creating and elevating new advantages of location. Those new location advantages are more ‘innovation advantages'. This is a very subtle, much misunderstood issue.

It's becoming popular for managers to dream about the virtual corporation that has no people, just a CEO who makes decisions. Nobody works at the company; they're at home wired in on the Internet. Parts come together from India and all over the place. But if that's the way the world is going to look then anybody can achieve it and advantages will be quickly replicated.

So in some sense, I find that managers have a curious fascination with ways of thinking that essentially destroy their competitive advantages.

Recalibrating Economies around Innovation

If we apply this thinking to economies rather than companies, governments have to understand first and foremost that there is a new paradigm of competitiveness. It's a paradigm based on innovation. It's a paradigm based on specialization - countries prosper in areas where they can achieve unique specialization and critical mass. They cannot try to be in everything.

Governments have to understand that everything they do needs to be recalibrated around the paradigm of innovation. Regulation has to shift from slowing change down to speeding it up. Countries need to have strict regulation that pushes companies to the next generation of technology, rather than retarding them at the last generation.

Governments also need to understand that the only way economies can be innovative is by having a lot of local competition. The idea that the way to win is to have a single large firm has been made obsolete by the fact that scale is no longer as important as it once was, and only rapid progress driven by competitive pressure will allow prosperity. If governments can grasp the fact that there is a new paradigm, then many of the policies for improving the competitiveness of their economies become relatively obvious.

RG: What needs to change inside organizations to create the cultural and constitutional conditions for strategic innovation?

First, we've got to set the goal of learning. The companies that are going to be able to become successful, or remain successful, will be the ones that can learn fast, can assimilate this learning and can develop new insights. I suspect that companies are going to have to become much more like universities than they have been in the past. Companies tended to think that they knew a lot, and therefore tried to be efficient in doing what they thought they knew. But it's now a matter of learning.

In addition, companies have to create an environment where people don't resist change but really expect it. An environment where companies cannibalize their own products, instead of waiting for some competitor to do it. Where companies render their own production processes obsolete rather than letting somebody else do it to them.

Finally, and most importantly, companies must reconnect with the whole idea of strategy. Success is more and more a function of making choices, and having the discipline to avoid the incredible pressures for compromise and distraction that are present if we're going to compete successfully in the twenty-first century.\94


What are the most common strategy mistakes?

  1. Managers confuse operational excellence as the strategy or marketing as the strategy. Managers tend to miss that strategy links choices on both the demand side (marketing) with the choices about the supply side (operational excellence). You cannot have strategy without addressing both.

  2. Over estimating strengths. Most companies have an inward looking bias and therefore are overzealous about what they do well. Real strengths have to be something the company does better than its competitors. They do it better because they are approaching it differently than their competitors.

  3. Getting the definition of the business wrong. Defining the industry too narrowly could cause you to miss competitors outside your industry who could encroach on your markets. Defining the industry too broadly can be dangerous because it can lead you to a decision that takes you too far from your core competencies.

  4. Not having a strategy at all. According to Porter, this is the worst mistake of all. Many managers find it hard to make choices and accept limits to their business. They find it difficult to let go of anything irrespective of the fact that the product or market has lost its value. Rather, they want to offer more products, serve more markets and satisfy more customers in the name of growth. The result is more complexity and misunderstanding in the ranks.

Tarot Spread

69. Nine of Pentacles
Bad Faith, Artifices, Deception

59. Five of Swords
Mourning, Sadness, Affliction

14. Temperance
Ill-advice Combinations, Disunion, Clashing Interests