Competitive Advantage

Competitive Advantage The Essential Complement To The Pathbreaking Book Competitive Strategy, Michael E Porter S Competitive Advantage Explores The Underpinnings Of Competitive Advantage In The Individual Firm Competitive Advantage Introduces A Whole New Way Of Understanding What A Firm Does Porter S Groundbreaking Concept Of The Value Chain Disaggregates A Company Into Activities, Or The Discrete Functions Or Processes That Represent The Elemental Building Blocks Of Competitive Advantage Now An Essential Part Of International Business Thinking, Competitive Advantage Takes Strategy From Broad Vision To An Internally Consistent Configuration Of Activities Its Powerful Framework Provides The Tools To Understand The Drivers Of Cost And A Company S Relative Cost Position Porter S Value Chain Enables Managers To Isolate The Underlying Sources Of Buyer Value That Will Command A Premium Price, And The Reasons Why One Product Or Service Substitutes For Another He Shows How Competitive Advantage Lies Not Only In Activities Themselves But In The Way Activities Relate To Each Other, To Supplier Activities, And To Customer Activities Competitive Advantage Also Provides For The First Time The Tools To Strategically Segment An Industry And Rigorously Assess The Competitive Logic Of Diversification That The Phrases Competitive Advantage And Sustainable Competitive Advantage Have Become Commonplace Is Testimony To The Power Of Porter S Ideas Competitive Advantage Has Guided Countless Companies, Business School Students, And Scholars In Understanding The Roots Of Competition Porter S Work Captures The Extraordinary Complexity Of Competition In A Way That Makes Strategy Both Concrete And Actionable

Michael E Porter is the leading authority on competitive strategy, the competitiveness and economic development of nations, states, and regions, and the application of competitive principles to social problems such as health care, the environment, and corporate responsibility.Professor Porter is generally recognized as the Father of Strategy , as has been identified in a variety of rankings and

[Read] ➪ Competitive Advantage  Author Michael E. Porter –
  • Hardcover
  • 592 pages
  • Competitive Advantage
  • Michael E. Porter
  • English
  • 06 October 2017
  • 9780684841465

10 thoughts on “Competitive Advantage

  1. says:

    Below are key excerpts from the book that I found particularly insightful 1 Both industry attractiveness and competitive position can be shaped by a firm, and this is what makes the choice of competitive strategy both challenging and exciting While industry attractiveness is partly a reflection of factors over which a firm has little influence, competitive strategy has considerable power to make an industry competitive strategy has considerable power to make an industry m or less attractive At the same time, a firm can clearly improve or erode its position within an industry through its choice of strategy Competitive strategy, then, not only responds to the environment but also attempts to shape that environment in a firm s favor These two central questions in competitive strategy have been at the core of my research 2 The ability of firms to shape industry structure places a particular burden on industry leaders Leaders actions can have a disproportionate impact on structure, because of their size and influence over buyers, suppliers, and other competitors At the same time, leaders large market shares guarantee that anything that changes overall industry structure will affect them as well A leader, then, must constantly balance its own competitive position against the health of the industry as a whole Often leaders are better off taking actions to improve or protect industry structure rather than seeking greater competitive advantage for themselves 3 The second central question in competitive strategy is a firm s relative position within its industry Positioning determines whether a firm s profitabihty is above or below the industry average A firm that can position itself well may earn high rates of return even though industry structure is unfavorable and the average profitability of the industry is therefore modest The fundamental basis of above average performance in the long run is sustainable competitive advantage Though a firm can have a myriad of strengths and weaknesses vis a vis its competitors, there are two basic types of competitive advantage a firm can possess low cost or diff erentiation The significance of any strength or weakness a firm possesses is ultimately a function of its impact on relative cost or diff erentiation Cost advantage and differentiation in turn stem from industry structure They result from a firm s ability to cope with the five forces better than its rivals The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them lead to three generic strategies for achieving above average performance in an industry cost leadership, diff erentiation, and focus The focus strategy has two variants, cost focus and differentiation focus 4 The ability to be both low cost and differentiated is a function of being the only firm with the new innovation, however Once competitors also introduce the innovation, the firm is again in the position of having to make a tradeoff 5 Linkages among value activities arise from a number of generic causes, among them the following The same function can be performed in different waysThe cost or performance of direct activities is improved by greater efforts in indirect activitiesActivities performed inside a firm reduce the need to demonstrate, explain, or service a product in the fieldQuality assurance functions can be performed in different ways 6 Exploiting linkages usually requires information or information flows that allow optimization or coordination to take place Thus, information systems are often vital to gaining competitive advantages from linkages 7 Cost dynamics occur because of the interplay of cost drivers over time, as a firm grows or as industry conditions change The most common sources of cost dynamics include Industry Real GrowthDifferential Scale SensitivityDifferent Learning RatesDifferential Technological ChangeRelative Inflation of CostsAgingMarket Adjustment 8 Steps in Strategic Cost Analysis1 Identify the appropriate value chain and assign costs and assets to it 2 Diagnose the cost drivers of each value activity and how they interact 3 Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences 4 Develop a strategy to lower relative cost position through controlling cost drivers or re configuring the value chain and or downstream value 5 Ensure that cost reduction efforts do not erode differentiation, or make a conscious choice to do so 6 Test the cost reduction strategy for sustainability 9 Steps in DifferentiationI Determine who the real buyer is2 Identify the buyer s value chain and the firm s impact on it3 Determine ranked buyer purchasing criteria4 Assess the existing and potential sources of uniqueness in a firm s value chain5.Identify the cost of existing and potential sources of differentiation6.Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating7.Test the chosen differentiation strategy for sustainability8.Reduce cost in activities that do not affect the chosen forms of differentiation 10 Technological change is not important for its own sake, but is important if it affects competitive advantage and industry structure Not all technological change is strategically beneficial it may worsen a firm s competitive position and industry attractiveness High technology does not guarantee profitability Indeed, many high technology industries are much less profitable than some low technology industries due to their unfavorable structures 11 Formulating Technological Strategy1 Identify all the distinct technologies and subtechnologies in the value chain 2.Identify potentially relevant technologies in other industries or under scientific development3.Determine the likely path of change of key technologies4.Determine which technologies and potential technological changes are most significant for competitive advantage and industry structure5.Assess a firm s relative capabilities in important technologies and the cost of making improvements.6.Select a technology strategy, encompassing all important technologies, that reinforces the firm s overall competitive strategy 12 Competitors are not all equally attractive or unattractive A good competitor is one that can perform the beneficial functions described above without representing too severe a long term threat A good competitor is one that challenges the firm not to be complacent but is a competitor with which the firm can achieve a stable and profitable industry equilibrium without protracted warfare Bad competitors, by and large, have the opposite characteristics No competitor ever meets all of the tests of a good competitor Competitors usually have some characteristics of a good competitor and some characteristics of a bad competitor Some managers, as result, will assert that there is no such thing as a good competitor This view ignores the essential point that some competitors are a lot better than others, and can have very different effects on a firm s competitive position In practice, a firm must understand where each of its competitors falls on the spectrum from good to bad and behave accordingly 13 To segment an industry, then, four observable classes of segmentation variables are used either individually or in combination to capture differences among producers and buyers In any given industry, a, any or all of these variables can define strategically relevant segments Product variety The discrete product varieties that are, or could be, produced Buyer type The types of end buyers that purchase, or could purchase, the industry s products Channel immediate buyer The alternative distribution channels employed or potentially employed to reach end buyers Geographic buyer location The geographic location of buyers defined by locality, region, country, or group of countries 14 Industry Segmentation 1 Identify the discrete product varieties, buyer types, channels, and geographic areas in the industry that have implications for structure or competitive advantage 2 Reduce the number of segmentation variables by applying the significance test 3 Identify the most meaningful discrete categories for each variable 4 Reduce the number of segmentation variables further collapsing correlated variables together 5 Plot two dimensional segmentation matrices for pairs of variables and eliminate correlated variables and null segments 6 Combine these segmentation matrices into one or two industry segmentation matrices 15 Sharing activities among business units is, then, a potential substitute for market share in any one business unit A firm that can i share scale or learning sensitive activities among a number of business units may neutralize the cost advantage of a high market share firm competing with one business unit Sharing is not exactly equivalent to increasing market share in one business unit, however, because a shared activity often involves greater complexity than an equivalent scale activity serving one business unit The complexity of a shared logistical system involving ten product varieties may increase geometrically cc compared to one that must handle only five The added complexity becomes a cost of sharing 16 Formulating Horizontal Strategy 1 Identify all tangible interrelationships2 Trace tangible interrelationships outside the boundaries of the firm 3 Identify possible intangible interrelationships4 Identify competitor interrelationships5 Assess the importance of interrelationships to competitive advantage6 Develop a coordinated horizontal strategy to achieve and enhance the most important interrelationships7.Create horizontal organizational mechanisms to assure implementation 17 While there are many non Japanese firms that have achieved interrelationships, a number of characteristics of many, though not all, Japanese firms make them well positioned for exploiting interrelationships strong belief in overarching corporate themes internal development of new businesses a less rigid tradition of autonomy flexible incentives, less based on business unit results willingness to centralize activities greater tradition of committees and frequent personal contact among executives intensive and continuing in house training corporatewide hiring and training 18 Complements are pervasive in industries A firm must know what complementary products it depends on, and how they affect its competitive advantage and the structure of the industry as a whole A firm must decide which complements it should produce itself, and how to package and price them Bundling and unbundling of complements to package and price them bundling and unbundling of complements is one of the ways in which fundamental industry restructuring takes place The challenge is to make strategy towards complements an opportunity rather than a source of competitive advantage for competitors 19 An industry scenario is an internally consistent view of an industry s future structure It is based on a set of plausible assumptions about the important uncertainties that might influence industry structure, carried through to the implications for creating and sustaining competitive advantage An industry scenario is not a forecast but one possible future structure A set of industry scenarios is carefully chosen to reflect the range of possible and credible future industry structures with important implications for competition The entire set of scenarios, rather than the most likely one, is then used to design a competitive Strategy The time period used in industry scenarios should reflect the time horizon of the most important investment decisions 20 The best way to deal with uncertainty is to make a conscious choice to follow one or approaches, rather than a choice based on inertia or an implicit scenario Weighing the factors involved in choosing 5 an approach described above requires a logic for each scenario that portrays the interdependencies between various aspects of industry structure The most challenging part of dealing with uncertainty is to find creative ways to minimize the cost of preserving flexibility or hedging, and to maximize the advantages of betting correctly Understanding the way in which each activity in the value chain can contribute to competitive advantage under the various scenarios may allow the firm to do so 21 Conditions for Attacking a Leader Successfully attacking a leader requires that a challenger meet threes basic conditions 1 A sustainable competitive advantage2 Proximity in other activities3 Some impediment to leader retaliation 22 Some important industry signals of leader vulnerability include discontinuous technological change buyer changes changing channels shifting input costs or quality gentlemen s gameThe following traits of industry leaders are signs of possible vulnerability struck in the middle unhappy buyer pioneer of current industry technology very high profitability history of regulatory problems weak performer in the parent company portfolio.

  2. says:

    If they were ever relevant, this book s theories are almost completely outdated and misleading now.Still the core concepts are useful to understand, because they ve been drilled into the heads of most MBA s and many haven t learned to question Porter s dangerously misleading precepts Learning them will reveal a set of blind spots that afflict many of your partners, clients and competitors In fact, blind spots may be too mild For some they re an Achilles Heel Awareness of these common defects helps you protect your clients and partners and win over competitors or convert them into allies Now there is where Porter can help your strategic thinking Just read it with a critical eye, with those goals in mind Don t take it at face value or drink the counterproductive Kool Aid.Also, a lot of the language and buzzwords here influenced 1980s and 1990s American business speak, and that can help in communicating and working with old school businessfolk They play an important role and it helps to speak their language.

  3. says:

    Dry and dated. Reads like an old textbook Some useful concepts illustrated with examples from companies that are no longer part of today s world..making its content harder to apply.

  4. says:

    Michael Porter has unquestionably been to corporate strategy what Mendelejev was to chemistry with the periodic table or von Linn to botany with the taxonomy system But perhaps different from these two, for our purposes here it is a tricky task indeed to separate one piece of Porter s work to review The sum of value of Competitive Strategy, Competitive Advantage, The Competitive Advantage of Nations, On Competition and numerous groundbreaking papers, is simply greater than the individual parts But given the staying power of the book and Mr Porter s own opinion today, 25 years later, we believe Competitive Advantage is a his best work, b is without any precedence in management literature and c serves up the most relevance for analyzing a business from an investor s perspective.Competitive Advantage was written in 1985, five years after his Five Forces book Competitive Strategy Before then, the analysis of why a firm gained competitive advantage was restricted to one word size This was obviously a somewhat na ve and self contradictory reasoning that dealt with the outcome of competitive advantage rather than its true cause With this book and its later follow up articles, seminars, papers etc, Porter practically coined the phrase competitive advantage and its crucial add on sustainable He had spent the years subsequent to the publishing of Competitive Strategy wrestling with the challenge of how to find a systematic way of examining the roots of competitive advantage that revealed essential differences between organizations without being unbearably complex or too cumbersome to use In that way, Porter in 1985 saw Competitive Advantage as a major leap forward and that would stand the test of time And he still does The ideas in Competitive Advantage are still percolating.In the book Porter put forward two difference makers in a firm s quest towards finding and sustaining an edge vs competition being the low cost provider or having a clear product differentiation Part IV of the book, where he deals with product differentiation as a concept, is arguably where Competitive Advantage comes to its fore It is eloquently explained, relatively easy to grasp and put in historical context As many readers and practitioners before me have opined, product differentiation is not hard to understand conceptually, especially not in hindsight yes, Coca Cola has it But is much harder to see in real time, and even of a stretch to actually implement into an organization.Porter s method, of course, is via what he calls the firm s activities This is the book s third major pillar, apart from low cost and product differentiation Think of activities as the tool that makes strategy operational Porter has later stated that this was a major breakthrough for him, insomuch as it provided a needed boost to the at the time popular SWOT based analysis For all its convenience and checklist appeal , SWOT did recognize that a firm is indeed multidimensional, but it failed to provide a link to profitability or explore the sources of competitive advantage in a systematic way This is something that Porter s activities did, and was such a powerful tool to corporations that it morphed into accounting as well Activity based cost accounting is a familiar term to the profession today.Porter s later research has also largely dealt with the concept of activities What makes them so hard to imitate How do they develop over time Personally, this work is of great interest to me Mainly because it is the most elusive, and thus hardest to copy To a great extent it also overlaps with the concept of corporate culture A great culture is nothing but a carefully crafted set of activities, developed over time within a firm Of course, a brilliant book in its own right in this realm is Bruce Greenwald s Competition Demystified from 2005.

  5. says:

    I d be loathe to recommend this book to anyone outside of a business degree or the financial industry It certainly reads like a theory dug up from the schools of higher education Of course, we can t forget how some of the best stories and legends deal with competition and leaders.Why would people be a competitive advantage It would likely feed into the notion that everyone is a risk manager and called to be leaders This, in turn, leaves us vulnerable to attack if some agents become outed as provocateurs Sometimes it appears like the leadership eats its own, we would force retirement if situations weren t addressed in a sufficient manner.

  6. says:

    Understanding competition in the business world is what this Harvard Professor is all about, he believes capitalism is our best benefactor and our savior in the future This is the book for understanding what business is all about Though a bit dated, if combined with his new writings it gives you an overall picture of business, while portraying what an individual can do alsoA must read for any businessman, from student to senior leader.All the best,Donald

  7. says:

    Timeless advice

  8. says:

    too much technical

  9. says:

    Masterpiece Everytime i read i find something useful.

  10. says:

    Good rigorous overview of how to go about appraising a market and in particular the competition that will be faced and the considerations that need to be made in face of the identified and also less obvious competition e.g from adjacent markets technologies The process is sound although where the book is of course now struggling is in it s age it was written and published in the mid 70 s and of course much has chnaged since then in how fast a market moves and in the tools available to make a market assessment Great base material ripe for being refreshed to encompass the internet age.

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