Understanding Michael Porter · 2011
Strategy explains how an organisation achieves superior performance amid competition. The fundamental concept is that strategic success comes not from being the "best" but from being "unique" in creating and capturing value.
Competitive Mindset
The notion that there is a single "best" product or service in most markets is flawed. When companies aim to be the best, they imitate each other, triggering price wars and leaving distinctive customer needs unmet. This competitive convergence reduces choice for customers and erodes profitability for all.
Competition isn't zero-sum warfare. Multiple companies in one industry can thrive by serving different customers with unique value propositions. Size and market domination have limits - General Motors was the largest carmaker for decades but went bankrupt, while smaller BMW earned superior returns.
Competing to be unique thrives on innovation, while competing to be the best feeds on imitation. Companies that innovate to create distinct customer value generate healthier profits and sustain stronger performance over time.
The Five Forces: Competition for Profits
Profit fundamentally equals Price minus Cost. The Five Forces framework explains how value gets divided among industry players and what determines average profitability:
- Buyers can force prices down when they're large, can easily switch vendors, or see little differentiation among offerings.
- Suppliers (including labour) can charge higher prices or demand better terms when they have significant bargaining leverage.
- Substitutes that meet the same basic need in different ways put a cap on industry profitability by forcing price constraints.
- New Entrants threaten to add capacity when barriers (like brand loyalty or capital requirements) are low, forcing incumbents to keep prices down.
- Rivalry between existing competitors can dissipate value through price wars or expensive marketing battles, especially in fragmented industries.
These forces encapsulate how supply and demand interact in imperfect markets. Technology, regulation, and growth matter only insofar as they influence these five forces.
Industry analysis involves defining the relevant industry, identifying players for each force, assessing drivers behind each force, evaluating overall industry structure, analysing likely changes, and positioning to exploit or reshape these forces.
Competitive Advantage: The Value Chain
Competitive advantage means creating superior value by operating at lower cost, commanding premium prices, or both. Return on invested capital (ROIC) is the best measure of sustained success, not metrics like share price or growth alone.
The value chain represents the sequence of activities a company performs to design, produce, sell, deliver, and support its products. These activities determine cost structure and value creation. Value chain analysis involves mapping industry activities, comparing your chain to rivals, identifying price and cost drivers, and exploring ways to perform activities differently or more effectively.
Operational effectiveness (executing the same activities as rivals but better) rarely provides a sustainable edge because competitors can imitate best practices. True competitive advantage comes from performing different activities or performing similar activities differently, creating a unique configuration that widens the gap between buyer value and cost.
Five Tests of Good Strategy
A good strategy must pass five tests:
1. Distinctive Value Proposition
A value proposition must target specific customers, meet particular needs, and offer an appropriate relative price. It asks: Which customers? Which needs? What relative price? Without differentiation from rivals, you're merely competing to be the best, not on strategy.
Positioning maps visualise where different value propositions exist in terms of price, features, and other factors. They reveal over-served customers who might respond to lower-cost options and under-served customers willing to pay more for enhanced offerings.
2. Tailored Value Chain
The value proposition looks outward at customers while the value chain focuses internally on operations. Strategy integrates both demand and supply sides. A tailored value chain means either performing different activities than rivals or performing similar activities differently.
Strategic advantage becomes durable when competitors must replicate an entire system of mutually reinforcing activities rather than just copying a single best practice.
3. Trade-offs Different from Rivals
Trade-offs are choices that make strategies sustainable because they're difficult to match. They represent strategic forks in the road—if you take one path, you cannot simultaneously take another.
The common misconception that "more is always better" leads many companies to dilute their value proposition by trying to serve everyone. By deliberately making trade-offs, organisations reject certain customers and demands to better serve their chosen customers.
Good strategy requires choosing what not to do. These decisions directly impact profitability—when activities fit together to deliver something distinct, either costs drop or buyers pay a premium.
4. Fit Across Value Chain
Fit refers to how a company's activities reinforce each other, amplifying both value creation and cost advantage. Good strategies depend on making interdependent choices where the connection among activities creates a whole greater than the sum of its parts.
Three types of fit enhance performance:
- Consistency ensures no activity undermines the value proposition
- Reinforcement means one activity heightens the effect of another
- Substitution allows one activity to replace another altogether
An activity system map clarifies how key activities link to a firm's value proposition and to each other, highlighting opportunities to strengthen connections.
This perspective reframes "core competence"—advantage arises not from one or two internal capabilities but from a web of activities tailored to your unique positioning. Outsourcing becomes risky if it weakens this interdependence.
Fit strengthens sustainability by creating multiple obstacles for imitators. When competitors must replicate a complex system rather than a single practice, imitation becomes far less likely.
5. Continuity Over Time
Continuity ensures the other elements have time to mature and produce genuine competitive advantage. When strategies shift constantly, organisations can't build the complex systems or relationships underlying superior performance.
Continuity reinforces identity, strengthens external relationships, and allows deeper improvements in activities and fit. It doesn't mean standing still—there can be enormous innovation in how the core value proposition is delivered while maintaining strategic direction.
Even in uncertain environments, great strategies rarely depend on detailed predictions of the future. Sound positions often rest on relatively stable needs or broad trends. Companies substituting flexibility for strategy never stand for anything or become good at anything.
There are conditions that require strategic change: when core customer needs fundamentally alter, when innovations break old trade-offs, or when technology or regulation reshapes the industry. Otherwise, maintaining direction increases adaptability by focusing innovation where it matters most.
Practical Implications
- Competing to be the best is self-destructive.
- Size and growth mean nothing without profit. Competition is about profits, not market share.
- Competitive advantage is about creating unique value for customers. It will show up on your P&L.
- A distinctive value proposition is essential, but strategy requires a specifically tailored value chain to deliver it.
- Good strategy deliberately makes some customers unhappy—you don't need to delight everyone.
- Strategy must clarify what the organisation will not do. Trade-offs make competitive advantage possible and sustainable.
- Good execution is necessary but rarely sufficient for sustainable advantage.
- Good strategies depend on many interconnected choices, not a single core competence.
- Too much flexibility prevents an organisation from standing for anything or becoming good at anything.
- Committing to a strategy doesn't require heroic predictions about the future. Commitment actually improves innovation and adaptability.
The essence of Porter's teaching is straightforward yet challenging: managers must maintain a clear line of sight between their decisions and performance. Strategy is not about being the best but creating unique value, and sustainability comes from a system of activities that competitors cannot easily replicate.
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Seven Cardinal Virtues of Human-Machine Teamwork: Examples from the DARPA Robotic Challenge
Matthew Johnson et al. 2014. (View Paper → ) This article plays counterpoint to our previous discussions of the "seven deadly myths" of autonomous systems….
As we unfold the principles that enable these virtues to emerge, it will become clear that fully integrating them into the design of intelligent systems requires the participation of a broad range of stakeholders who aren't always included in such discus-sions, including workers, engineers, operators, and strategic visionaries developing research roadmaps. The principles aren't merely for the consumption of specialists in human factors or ergonomics. We illustrate these principles and their resultant virtues by drawing on lessons learned in the DARPA Robotics Challenge.
Instead of chasing full autonomy, design for robust human‐machine teamwork. Design principles fir resilient and efficient system:
- Clarity: Focus on overall mission success rather than just maximising autonomous functions. Design systems that clearly delineate when human input should guide the machine, ensuring that decisions are made with an eye on real-world performance.
- Humility – Recognise that perfect autonomy is unattainable. Instead, embrace a design that accepts the limits of automation and leverages human oversight to cover the tricky 20 percent of challenges that machines alone can’t resolve.
- Resilience – Plan for failure from the start. By incorporating multiple fallback options and designing systems that can adapt when things go wrong, teams can recover quickly instead of suffering catastrophic failure.
- Helpfulness – Instead of a strict “divide and conquer” (assigning entire tasks solely to either the machine or the human), design for collaboration where both contribute their strengths. This means enabling the system so that humans and machines can support each other dynamically.
- Cohesiveness – Build systems that are observable, predictable, and directable. By ensuring that both the machine’s state and the human’s interventions are transparent and well-coordinated, the overall teamwork becomes more unified and effective.
- Integrity – Integrate the design of machine algorithms with the user interface. This holistic approach ensures that the underlying technical processes and the human interaction layer evolve together to support mutual understanding and smooth operation.
- Thrift – Right-size human involvement rather than simply trying to cut costs by minimising manpower. The idea is to strike the right balance where human contribution is engaged only as much as necessary, ensuring cost-effectiveness without sacrificing performance.
A hybrid approach leveraging human flexibility and machine precision can better handle unpredictable and challenging conditions.
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Book Highlights
In many domains people are tempted to think, after the fact, that the success of a musician, actor, author, or politician was inevitable in light of his or her skills and characteristics. Beware of that temptation. Small interventions and even coincidences, at a key stage, can produce large variations in the outcome Cass R Sunstein and Richard H Thaler · Nudge
The general environment is characterized by friction. Friction means that there will always be less information available than we would like, that identifying the essential information is difficult, and that understanding each other will require special effort Stephen Bungay · The Art of Action.
As a manager, one of the smartest ways to multiply your team’s impact is to hire the best people and empower them to do more and more until you stretch the limits of their capabilities. Julie Zhuo · The Making of a Manager
A good strategy is, in the end, a hypothesis about what will work. Not a wild theory, but an educated judgment. Richard Rumelt · Good Strategy / Bad Strategy
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Quotes & Tweets
Just make it exist first. You can make it good later. Adam Grant
It doesn’t make sense to continue wanting something if you’re not willing to do what it takes to get it. James Clear