There are few better-known writers on strategy than Michael Porter. As the author of this guide, Joan Magretta says, Porter “...occupies a unique position. Among academics, he is the most cited scholar in economics and business. At the same time, his ideas are the most widely used in practice buy business and government leaders around the world. His frameworks have become the foundation of the strategy field.”
Nevertheless, as Magretta, his long-time editor and herself a strategy consultant points out, many managers have not read Porter’s articles or books, and have often got the wrong impression of his insights.
Her book aims to distil the essence of Porter’s work for managers. It is not an academic work (thank goodness), and does not attempt to summarise all of Porter’s work but only that on competition (Part I of the book) and strategy (part II). She describes it as not as a “how-to” book, but more of a “how-to-think-about” book.
Magretta’s deep familiarity with Porter’s work allows her to summarise concepts developed over a long period into simple-to-understand concepts. Discussing strategy, for instance, she asks “What’s the definition of superior performance?” and immediately answers it: firstly, the right mind-set, by which she means “aim to be unique, not the best.” And secondly, making sure you use the right analytics (ie: “where does superior performance come from?”) to which the answer is, partly from the structure of the industry, and partly from the company’s relative position within its industry.
It’s refreshing to read criticism of prevailing philosophies, and Porter has always been strong on the chief executives who set a so-called strategy to be the best in their industry.
As Porter points out (and Magretta summarises, “Competing to be the best leads inevitably to a destructive, zero-sum competition that no one can win. As offerings converge, gain for one becomes loss for the other.”
Not surprisingly the airline industry figures large in this analysis, and airlines have chased after the same customers and those customers are left with nothing but price as the basis for their choices.
This is bad for the industry, which is engaged in mutually assured destruction, but also for customers, suppliers and employees who become collateral damage as the airlines cut costs. Eventual consolidation is the result for the industry, but it also means that many segments of the customer base are underserved even while paying low prices.
“Think about the last flight you took. It probably met the basic need of getting you where you needed to be. But was it a pleasant experience? Are you eager to fly again?”
Any competitive advantage by airlines is temporary since all companies are heading to the same place as they compete to be the best. As a result the airline industry has destroyed billions in shareholder value, lurches from one crisis to another, and generally offers poor service standards.
Another example is the Hotel Bed Wars of 2000-2005, where hundreds of millions were spent on improving the bed stock of hotels in an attempt by hotel companies to differentiate their offering, but with each company responding in turn, at its close all the beds had been upgraded and there was no differential at all (though we did get better beds as a result).
Instead Porter says companies should concentrate on competing to be unique, and here an example of the competition between the high speed train and plane on the Madrid – Barcelona route from 2008 provides the example, where passengers defected to the train en masse.. “Airline executives in Spain may have been defining their competition as other airlines. But customers who switch clearly don’t see it that way – and value is ultimately defined by customers.”
The summary of the Five Forces is well done, and also makes the clear point that “... there are a limited number of structural forces at work in every industry that systematically impact profitability in a predictable direction.” Competitive advantage is also clearly defined in the face of its loose usage (ie: “anything an organisation thinks it is good at.... “). In fact, “...if you have a real competitive advantage, it means compared with rivals, you operate at a lower cost, command a premium price, or both.”
There’s a fair amount of jargon here, but it’s all well explained, everything from value chain and trade-offs to fit and core competence (and there’s a glossary). The case studies are well chosen – Southwest, Ikea, Enterprise car rental, Lowe and Home Depot, Netflix and Blockbuster to name the main ones.
The book rounds off with a long and detailed interview between Magretta and Porter, which would be worth the price of the book alone. Porter is particularly clear on the current challenges for companies “Capital markets have become toxic for strategy. The single-minded pursuit of shareholder value... has been enormously destructive for strategy and value creation.”
There aren’t many who would disagree with that. Understanding Michael Porter is a good read, not too challenging, but thought-provoking, and may even direct people back to Porter’s work armed with a handy guide.
Tom Otley There are few better-known writers on strategy than Michael Porter. As the author of this guide, Joan Magretta says, Porter “...occupies a unique position. Among academics, he is the most cited scholar in economics and business. At the same time, his ideas are the most widely used in practice buy business and government leaders around the world. His frameworks have become the foundation of the strategy field.”
Nevertheless, as Magretta, his long-time editor and herself a strategy consultant points out, many managers have not read Porter’s articles or books, and have often got the wrong impression of his insights.
Her book aims to distil the essence of Porter’s work for managers. It is not an academic work (thank goodness), and does not attempt to summarise all of Porter’s work but only that on competition (Part I of the book) and strategy (part II). She describes it as not as a “how-to” book, but more of a “how-to-think-about” book.
Magretta’s deep familiarity with Porter’s work allows her to summarise concepts developed over a long period into simple-to-understand concepts. Discussing strategy, for instance, she asks “What’s the definition of superior performance?” and immediately answers it: firstly, the right mind-set, by which she means “aim to be unique, not the best.” And secondly, making sure you use the right analytics (ie: “where does superior performance come from?”) to which the answer is, partly from the structure of the industry, and partly from the company’s relative position within its industry.
It’s refreshing to read criticism of prevailing philosophies, and Porter has always been strong on the chief executives who set a so-called strategy to be the best in their industry.
As Porter points out (and Magretta summarises, “Competing to be the best leads inevitably to a destructive, zero-sum competition that no one can win. As offerings converge, gain for one becomes loss for the other.”
Not surprisingly the airline industry figures large in this analysis, and airlines have chased after the same customers and those customers are left with nothing but price as the basis for their choices.
This is bad for the industry, which is engaged in mutually assured destruction, but also for customers, suppliers and employees who become collateral damage as the airlines cut costs. Eventual consolidation is the result for the industry, but it also means that many segments of the customer base are underserved even while paying low prices.
“Think about the last flight you took. It probably met the basic need of getting you where you needed to be. But was it a pleasant experience? Are you eager to fly again?”
Any competitive advantage by airlines is temporary since all companies are heading to the same place as they compete to be the best. As a result the airline industry has destroyed billions in shareholder value, lurches from one crisis to another, and generally offers poor service standards.
Another example is the Hotel Bed Wars of 2000-2005, where hundreds of millions were spent on improving the bed stock of hotels in an attempt by hotel companies to differentiate their offering, but with each company responding in turn, at its close all the beds had been upgraded and there was no differential at all (though we did get better beds as a result).
Instead Porter says companies should concentrate on competing to be unique, and here an example of the competition between the high speed train and plane on the Madrid – Barcelona route from 2008 provides the example, where passengers defected to the train en masse.. “Airline executives in Spain may have been defining their competition as other airlines. But customers who switch clearly don’t see it that way – and value is ultimately defined by customers.”
The summary of the Five Forces is well done, and also makes the clear point that “... there are a limited number of structural forces at work in every industry that systematically impact profitability in a predictable direction.” Competitive advantage is also clearly defined in the face of its loose usage (ie: “anything an organisation thinks it is good at.... “). In fact, “...if you have a real competitive advantage, it means compared with rivals, you operate at a lower cost, command a premium price, or both.”
There’s a fair amount of jargon here, but it’s all well explained, everything from value chain and trade-offs to fit and core competence (and there’s a glossary). The case studies are well chosen – Southwest, Ikea, Enterprise car rental, Lowe and Home Depot, Netflix and Blockbuster to name the main ones.
The book rounds off with a long and detailed interview between Magretta and Porter, which would be worth the price of the book alone. Porter is particularly clear on the current challenges for companies “Capital markets have become toxic for strategy. The single-minded pursuit of shareholder value... has been enormously destructive for strategy and value creation.”
There aren’t many who would disagree with that. Understanding Michael Porter is a good read, not too challenging, but thought-provoking, and may even direct people back to Porter’s work armed with a handy guide.
Tom Otley 
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