“Competitive Strategy: Techniques for Analyzing Industries and Competitors” by Michael E. Porter is a classic business strategy text and must reading for anybody who has a serious interest in business strategy.
It was this book combined with Competitive Advantage which established Harvard Business School Professor, Michael Porter’s reputation as the pre-eminent thinker on business strategy in the eighties and nineties.
Like many leaders, you are there to be shot at and I find myself getting mad when I see his core ideas misrepresented and then criticised.
The Structure of Competitive Strategy
Competitive Strategy is written in three sections:
1. General Analytical Techniques
2. Generic Industry Environments
3. Strategic Decisions
and I’ll follow this logic for my review.
Competitive Strategy Part I General Analytical Techniques
It is this section which introduces two of Michael Porter’s most famous ideas:
If you have an interest in either, then this is very close to the beginning of the development of these ideas unless you want to read a 1979 Harvard Business Review article.
Five Forces of Competition
Michael Porter has issued a new Harvard Business Review in 2008 updating and extending his original 1979 article with more modern examples.
You may have already been introduced to the five forces but as a brief reminder, Michael Porter argued that industry profits and the intensity of competition were determined by five forces drawn from classical economics:
1. The buying power of customers
2. The power of suppliers to squeeze profits
3. The threat of new entrants coming into the industry
In Competitive Strategy Michael Porter identified three generic competitive strategies for business success:
- Cost leadership – you have the lowest costs
- Differentiation – your products and services are recognised as superior
- Focus – you concentrate on a small group of customers (relative to the total market) and provide them with the price / value combination they want.
Michael Porter has been criticised for saying that failure to choose mean that customers would be “stuck in the middle” and condemn themselves to inadequate performance.
There are some special cases which Michael Porter has addressed which do make it possible to have a differentiation advantage and a cost advantage at the same time. He went much further into how to create competitive advantage in his book Competitive Advantage where he introduced the concept of the value chain and the industry value chain.
Other Techniques For Analysing Industries and Markets
Less well known but equally valuable is guidance on how to prepare a competitor analysis so that you can understand what your competitors are trying to achieve, their likely moves and how they are likely to react to your moves.
Unfortunately it is a failing in the application of strategy in business that there is a tendency to ignore the plans and intentions of competitors.
Sounds crazy but busy managers prefer the step 1, 2, 3… approach which produces a strategic plan at the end rather than what can be endless debate about the possible actions and reactions in the market.
Unfortunately this act of management hubris of ignoring the very people you are trying to beat, leads to under-performance and criticism of the strategic planning process.
Other items covered in this first section of the book are:
1. Signalling to competitors – there are some great game theory applications on this that aren’t covered in the book but are fascinating – look for details on the prisoner’s dilemma and chicken.
2. Competitive moves
3. Strategies towards buyers and suppliers
4. Structural forces within industries which introduces the concept of strategic groups of competitors who have broadly similar strategies
5. Industry evolution and movements through the product life cycle
Competitive Strategy Part II Generic Industry Environments
Different industries develop different structures which was well illustrated by a little known concept (outside of strategy specialists) called the Strategic Environments Matrix by the Boston Consulting Group.
This identified four main industry types – fragmented, specialised, volume and stalemate based on the size and variety of competitive advantages available. While Michael Porter doesn’t pick up on the Strategic Environments Matrix in Competitive Strategy he does have chapters on:
1. Fragmented industries – local suppliers, no competitor dominates. Michael Porter looks at why industries stay fragmented and at the opportunities for a dynamic competitor to consolidate and acquire a critical competitive advantage.
2. Emerging industries – some new products are so innovative that they create new industries. For example before mobile cell phones, who was aware of Nokia but it rapidly became a household name. Michael Porter explains the underlying forces which determine industry evolution as the new product becomes more established.
3. Industry maturity – after a new industry goes through a rapid growth stage, the industry matures which presents new challenges for management.
4. Declining industries – some industries are able to constantly renew themselves within the existing technology eg the motor industry but others find their technology and product offerings obsolete or only appealing to a small number of die-hards. In this chapter Michael Porter looks at the issues of how you can decide whether you exit a declining industry early or stay around to reap “last man standing” profit.
5. Global industries – Michael Porter turned much more of his attention to the forces for globalisation later in his career but this is still a great source of the strategic drivers which determine why some industries do become global.
Competitive Strategy Part III – Strategic Decisions
In the last section of Competitive Strategy, Michael Porter looks at the factors that would help you to make key strategic decisions:
1. Vertical integration – moving forward into your customers’ markets or backwards to compete with suppliers.
2. Capacity expansion – you sell more, you want to expand but over-capacity is one of the most destructive contributors to intense competition in an industry as competitors get greedy and want more of the market or mis-read the market growth prospects, perhaps because they haven’t recognised the threat of an up and coming substitute.
3. Entry into new businesses – this may be through internal development or acquisition but Michael Porter examines the factors to establish whether diversification makes sense.
Conclusion – Competitive Strategy by Michael Porter
This is an outstanding book on competitive strategy and a great reference guide to go back to when you are considering a new strategic move.
I am delighted to give Competitive Strategy by Michael Porter my full 5 star rating.
Ignore the fact that Competitive Strategy was published in 1980 and buy this book. It is still very relevant to today’s marketplace.
Strategy has become a popular subject to cover in MBA programs, professional qualifications and many management development programs.
It is only when you read a book like Competitive Strategy that you realise just how much there is to know. My only criticism is that it is quite a dry read and you will probably not want to read it from start to finish in a concentrated burst.
But provided you become familiar with the five forces analysis technique, you will find that “Competitive Strategy” is quite easy to dip in and out as your needs change.
Generally most businesses are managed operationally and opportunistically rather than strategically with a clear direction in sight.
Used properly Competitive Strategy with the full implications of the forces behind industry structure and evolution over time, competitive analysis and signalling can help to change that.
The more you know about the way your industry is developing and the way your competitors are likely to act, the more prepared you can be. You will have the chance to consider your options and to pick the best ones like a chess Grand Master who is planning five steps ahead of his opponent.
Buying “Competitive Strategy” by Michael Porter
I recommend that you buy Competitive Strategy if you advise businesses or if you manage a business that employs more than 50 people and you want it to grow. You can get it from Amazon.com or Amazon.co.uk.(affiliate links)
I Will Keep Saying This Because It Is True.
It is much better to lose money on paper by exploring your ideas and how customers and competitors can be expected to act, than to lose real money by following a hastily conceived plan based on reacting to your competitors aggressive moves and that is exactly what Competitive Strategy by Michael Porter will help you to do.
Have You Read Competitive Strategy?
One of the big advantages of a blog over standard websites is that it allows interaction and debate. I would be interested to hear your views on Michael Porter and the ideas in the Competitive Strategy book.
Paul Simister is a differentiation coach who helps small business owners to profit from differentiating their businesses, being distinctive in the eyes of their customers and standing out in a crowded marketplace.
You too can move past your profit tipping point by answering the seven big questions of business success.