In the short-term, focusing on stock prices causes earnings management and encourages mimicking other companies. They’re each playing their own sport. In business, this leads to the syndrome of “competition to be the best.”. But, to extend my metaphor, if you really want to digest these critically important ideas, you have to be willing to chew on them before you swallow. As we’ll discuss later, these advantages should be achieved through a unique mix of activities that are difficult to replicate. Here Joan Magretta, Porter's former editor at Harvard Business Review, synthesizes the key tenets of Porter… The collection also includes the digital edition of the popular Understanding Michael Porter: The Essential Guide to Competition and Strategy, which offers a concise, accessible summary of Porter’s revolutionary thinking and was written with Porter’s full cooperation by Joan Magretta, his former editor at Harvard Business Review. Overall, how strong is this force? Trade-offs are strategic forks in the road. At the end of the book, the author sits down with Michael Porter to discuss commonly asked questions about strategy. The best meal? Too many companies pursue unprofitable growth that never leads to good ROIC. Understanding Michael Porter sets the record straight, providing the first concise, accessible summary of Porter's revolutionary thinking. Understanding Michael Porter Book Summary Understanding Michael Porter Book Summary distils Michael Porters’ main ideas and explains them in easy to understand terminology. Where does superior performance come from? The value chain focuses internally on operations. Strategy is integrative, bringing supply and demand sides together. Porter’s name, many managers misunderstand and misuse his concepts. Are the trade-offs different from rivals? Understanding Michael Porter sets the record straight, providing the first concise, accessible summary of Porter’s revolutionary thinking. In this summary, Magretta explains the relationship between porters 5 forces and profitability, the way to avoid competition and value chains … If you’ve penetrated your strategic opportunity at home, there’s always the rest of the world. Where many business strategies are fads that come nad go, Porter’s ideas are still widely used in management consulting and MBA programs today, 40 years after introduction. Written with Porter’s full cooperation by Joan Magretta, his former editor at Harvard Business Review, this new book delivers fresh, clear examples to illustrate and update Porter… As explained in the rest of the book, a superior strategy is a combination of unique activities that is hard to replicate, allowing you to increase prices for superior value and/or decrease costs uniquely. There are multiple contests that can support multiple winners. “Fit,” Porter says, “locks out imitators by creating a chain that is as strong as its strongest link.”. The richly developed strategies of IKEA or Southwest took years, decades to hone. Quantify your org’s long-term profitability against the overall economy, then against the average return in your industry. Written with Porter’s full cooperation by Joan Magretta, his former editor at Harvard Business Review , this new book delivers fresh, clear examples to illustrate and update Porter… (Revised August 2007.) A good strategy is a set of activities that achieves competitive advantage. Michael E. Porter is the Bishop William Lawrence University Professor in the Institute for Strategy and Competitiveness at the Harvard Business School, and an international authority on … In reality, strong strategies are built on many unique activities that fit together to deliver the unique value proposition. This is as important as defining what your company _will... Unlock the full book summary of Understanding Michael Porter by signing up for Shortform. Written with Porter's full cooperation by Joan … In a new market space, how do you build strategy and analyze the Five Forces before the industry has matured? Strategy isn’t a stir fry, it’s a stew - it takes time for the flavors and textures to develop. In the early years, a shareholder asked CEO Herb Kelleher if Southwest couldn’t raise its prices by just a few dollars since its $15 price on the Dallas–San Antonio route was so much lower than Braniff’s $62 fare. For a rival to achieve the same competitive advantage, they would need to replicate. If strategy truly is based on one core competence, then it becomes relatively easy to replicate. Less obviously, it’s possible to be stuck in the middle - if you try to be too many things, you’ll be outflanked by cost leaders on one side (who are “just good enough”) and by differentiators on the other side (who satisfy customers who want more). If you have a real competitive advantage, compared with rivals, you operate at a lower cost, command a premium price, or both. But In-N-Out deliberately focuses on slow burgers, with non-processed meat and fresher ingredients. UNDERSTANDING MICHAEL PORTER. Rivalry is particularly high when there are fewer competitors, the industry itself is growing, or when consumers can easily switch to another competitive product. Copyright © 2020 ShortForm™ | All Rights Reserved | Privacy | Terms, This is a preview of the Shortform book summary of, Understanding Michael Porter by Joan Magretta. Written. Great strategies are like complex systems in which all of the parts fit together seamlessly. Every week,subscribers are e-mailed a concise summary of a different business book. They’re also engaged in a struggle for profits with all the other players in the ecosystem - like customers, who would always like to pay less and get more, and are eager to substitute a product for a better alternative. You either serve food, or you don’t. Understand Porter and you will see why competing to be the best sparks an inevitable race to the bottom. While not every single activity need be unique, robust strategies always involve a significant degree of tailoring. Second, you must change whenever there are ways to extend your value proposition or better ways to deliver it. Scenarios in your disadvantage are usually the inverse of advantageous scenarios, so only notable alternatives will be listed. Do they have high or low switching costs to competitors? It must perform different activities than rivals or perform similar activities in different ways. Written with Porter’s full cooperation by Joan … War and sports are unidimensional and imply one victor. Fit also makes a strategy more sustainable by raising barriers to imitation. A distinctive value proposition, and a tailored value chain to deliver it, are the foundation of strategy. Walmart began by servicing small towns with populations below 10,000, which other discount retailers deliberately stayed away from. Understanding Michael Porter sets the record straight, providing the first concise, accessible summary of Porter’s revolutionary thinking. Here are examples of bad strategies that won’t lead to a viable long-term advantage. There is little middle ground. Written with Porter’s full cooperation by Joan … Instead of trying to determine which activities are core, Porter asks a different question: In competing to be the best, imitation is easy, and advantages are temporary. What price will provide acceptable customer value and acceptable company profitability? Channels that influence the purchase decisions of end-users, Advisers like doctors, investment managers, Lowers prices, since powerful buyers will demand lower prices or else, Increases costs, since powerful buyers demand more value or else, If you’re large relative to buyers (i.e. Basic consistency: each activity aligns with the company’s value proposition and contributes incrementally. There’s no such thing as “the best.” Is there a best car? In response, Lowe’s appealed to women (the driving force for home improvement projects) through more inviting stores and inventory emphasizing home fashion, appliances, and decoration. Post was not sent - check your email addresses! Thus the value proposition and the value chain—the two core dimensions of strategic choice—are inextricably linked. These five forces—the intensity of rivalry among existing competitors, the bargaining power of buyers (the industry’s customers), the bargaining power of suppliers, the threat of substitutes, and the threat of new entrants—determine the industry’s structure. Good strategies depend on the connection among many things, on making interdependent choices. Unlock the full book summary of Understanding Michael Porter by signing up for Shortform. Make some customers unhappy. Read this summary … Written with Porter's full cooperation by Joan Magretta, his former editor at Harvard Business Review, this new book delivers fresh, clear examples to illustrate and update Porter… These smaller firms feared that the major companies would steal their IP. A good strategy delivers distinctive value through a distinctive value chain. Define what your company will not do. This book, Understanding Michael Porter is an accessible distillation of the core principles. Shortform summaries help you learn 10x faster by: Being 100% comprehensive: you learn the … The goal of every organization is to produce goods or services whose value exceeds the sum of the costs of all inputs. What’s a good strategic planning process? Beware of disruption not just from below (classic Clayton Christiansen) but also from above (when a premium product is stripped down to meet less sophisticated needs). Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every industry and helps determine an industry's weaknesses and strengths. Dell will preload software onto PCs, substituting for the customer’s IT department. Click to share on Twitter (Opens in new window), Click to share on Pocket (Opens in new window), Click to share on Facebook (Opens in new window), Click to share on LinkedIn (Opens in new window), Click to share on WhatsApp (Opens in new window), Click to share on Pinterest (Opens in new window), Click to email this to a friend (Opens in new window). But the bigger is picture than this. "Understanding Michael Porter" sets the record straight, providing the first concise, accessible summary of Porter's revolutionary thinking. Which customers are you going to serve? new book delivers fresh, clear examples to illustrate and update Porter s ideas. For example, McDonald’s is a winner in fast food and fast burgers. Keep digging to understand why it’s performing better or worse than average - relative price and relative... Strategy is not simply the value proposition itself - strategy must describe how the value is being created and delivered. That is, how your revenues and costs stack up against your rivals’. But while everyone in business may know Porter's name, many managers misunderstand and misuse his concepts. straight, providing the first concise, accessible summary of Porter s revolutionary thinking. The six-force model expands on Harvard Business School professor Michael Porter… To establish a competitive advantage, a company must deliver its distinctive value through a distinctive value chain. Understanding Michael Porter Enterprise focused on short-term rentals for city residents. Thus, Porter proposes the best metric is Return on Invested Capital (ROIC). But while everyone in business may know Porter's name, many managers misunderstand and misuse his concepts. For a nonprofit, there is no directly comparable metric, so you’ve got to create one. Who are the buyers in your industry? If the activities reinforce each other, imitating them all is difficult. Home Depot innovated with huge warehouses with well-trained associates to appeal to DIYers and contractors, mostly male. This is an unsustainable strategy. Taiwan Semiconductor made the choice to be a strictly OEM manufacturer, selling IP security as part of its offering. Sorry, your blog cannot share posts by email. In this book, the author distills Porter's core concepts and frameworks into a … ROIC tells you how well a company is using all its resources. Shortform summaries help you learn 10x faster by: READ FULL SUMMARY OF UNDERSTANDING MICHAEL PORTER. Operational trade-offs: Activities that deliver one kind of value are less efficient at producing another kind of value. You’re either hub-and-spoke, or you’re direct-flight. If they involve trade-offs, your activities may contradict those of competitors, making it difficult for them to plunge in. Trade-offs force you to limit your value proposition. Magretta uses her Understanding Michael Porter sets the record straight, providing the first concise, accessible summary of Porter's revolutionary thinking. Have a formal process with regular touchpoints - for instance, once every year or with quarterly reviews. Business strategy, as taught by Michael Porter, is not a subject which is intuitive. The point is to earn profits. Fit means that the value or cost of one activity is affected by the way other activities are performed. If an activity is over- or under-designed for its use, value will be destroyed. The value proposition focuses externally on the customer. Then we’ll see how a unique value chain is the mechanism by which superior profits are achieved. Product trade-offs: Tailoring a product to suit one need makes it less capable of servicing another need. Expand geographically in a focused way. A Distillation of The Most Important Business Thinking of Our Time Michael Porter’s groundbreaking ideas on competition and strategy have unfolded over three decades and are spread across a dauntingly long list of publications. Netflix’s large catalogue gives more chances to collect data points to make better recommendations. Are they concentrated or fragmented? Strategy is not fast food, and neither is Porter. Discover which forces influence your success the most. understanding michael porter the essential guide to competition and strategy michael porter is the thought leader in the field of business strategy he has single handedly shaped the way in … Understanding Michael Porter will enable all leaders throughout any organization t grasp Porter… Companies need breathing room to hone their activities and develop competitive advantage over time. The point of competition is not beating your rivals. Substitution: Performing one activity makes it possible to eliminate another - within the company, or for customers/suppliers in the value system. Hertz provided cars at airports to business and leisure travelers. Written with Porter's full cooperation by Joan Magretta, his former editor at Harvard Business Review, this new book delivers fresh, clear examples to illustrate and update Porter… Understanding Michael Porter will enable all leaders throughout any organization t grasp Porter… Good strategies depend on the connection among many things. As a simplistic example, say there are 5 activities that give a company a competitive advantage. A major challenge for every nonprofit is to define its goal or goals in terms of the social benefits it seeks to create. Strategies often begin with 2 or 3 … Porter, Michael E. "Understanding Industry Structure." Each thing you do amplifies the value of the other things you do. One of the important lessons about strategy is that if you’re pursuing a different positioning, then different metrics will be relevant. Continuity strengthens a company’s position in three ways: It takes years to implement a strategy. When activities are inconsistent, they cancel each other out. Strategy is the means by which a company, faced with competition, achieves superior profitability. Porter’s seminal works are two tomes, Competitive Strategy and Competitive Advantage, covering 1,000 pages of business strategy. This is a clear departure from the (mistaken) idea of the one core competence. Is there a distinctive value proposition? Example: many of Southwest’s activities are directionally pointed toward lowering cost and increasing convenience. buyers are fragmented). a fragmented supplier group is bad for suppliers but good for you). Truck maker Paccar appeals directly to individual owner-operators through comfort and customization, rather than brands like Peterbilt that appeal to large corporate buyers... Return on sales: ignores the capital invested in the business. Understanding Michael Porter sets the record. Reuter started with spreading market information through pigeons, then moving onto telegraph and the Internet. Every manager can name individual pieces of his work—competitive advantage, the value chain, five forces—but no one, not even Porter … As long as there is stability in the core value proposition, there should be innovation in how it’s delivered. If you have a real competitive advantage, compared with rivals, you operate at a lower cost, command a premium price, or both. But business is multidimensional. "Understanding Michael Porter" sets the record straight, providing the first concise, accessible summary of Porter's revolutionary thinking. Dell had suppliers co-locate warehouses nearby, (Shortform example: Amazon works with manufacturers to repackage goods in shipping-friendly forms). Learn from it and see how it can be modified to reinforce your strategy. Identify the players constituting each of the five forces and, where appropriate, segment them into groups. Your best practices will quickly... Read full summary of Understanding Michael Porter. There is no glory in growth if it’s profitless. Micheal … Analyze recent and likely future changes for each force. Don’t take massive risks growing beyond the capacity of your strategy and industry structure. Instead of creating a comprehensive reference guide to legendary strategic thinker Michael Porter, … Assess the underlying drivers of each force. With a large range of activities, it becomes unclear which of the company’s activities are most valuable to replicate. Competing using the same activities as competitors, but hoping to do it better, is often called operational effectiveness. My goal is to present the essential Porter in a form that can be more easily digested and put to work than the original. Strategy goes an important step further. Kelleher said no, our real competition is ground transportation, not other airlines. How can you position yourself in relation to the five forces? Study the Five Forces in your industry to understand its overall profitability. Written with Porter’s full cooperation by Joan Magretta, his former editor at Harvard Business Review, this new book delivers In 1987, major semiconductor companies manufactured their own chips and sold excess capacity to smaller firms. “What Is Strategy?” (1996), one of the most-cited and best-selling HBR articles of all time, and “The Five Competitive Forces That Shape Strategy” (2008). In business, your default thought should not be “how do I win this market,” but rather “which segment of the industry can I service well?”. Fit has to do with how the activities in the value chain relate to one another. Six-Force Model: A design used to show how companies or industries are affected by external factors. Porter’s answer can be divided into two parts. What is your unique value proposition? Note that every adjacent industry has its own Five Forces, so that their relative disadvantage can be your gain (e.g. Define the relevant industry by both its product scope and geographic scope. He is the Bishop William Lawrence University … Strategies often begin with 2 or 3 essential choices, then adding additional activities to extend the fit. When you analyze the power of suppliers, be sure to include all of the purchased inputs that go into a product or service, including labor (i.e., your employees). Understanding Michael Porter will enable all leaders throughout any organization to grasp Porter's seminal ideas about competition and strategy and deploy them to achieve competitive success. Pay higher dividends and enjoy the creation of wealth. The essence of strategy is to create your own path. A good strategy delivers distinctive value through a distinctive value chain. More often, industries compete fiercely to control the one key “resource” - distribution channels, product portfolios - thus driving up cost. A business model highlights the relationship between your revenues and your costs. An effective strategy is dynamic. BMW embraced OE improvements to decrease design time, but stopped short of steps that would remove its unique design language. Without tailoring, your value chain will have inefficiencies that more focused competitors will exploit. "Understanding Michael Porter" sets the record straight, providing the first concise, accessible summary of Porter's revolutionary thinking. Understanding Michael Porter sets the record straight, providing the first concise, accessible summary of Porter’s revolutionary thinking. Deepen your strategic position, don’t broaden it. The fallacy here is that good strategies don’t rely on just one thing, on making one choice. What relative price will you offer? There is no “best” in any industry, just like there is no “best performance artist.” There are different buyer needs, and there can be multiple winners. And it enhances sustainability as well. The value proposition is the piece of strategy that looks outward at customers, the demand side. Avoid the temptation to serve more customers and offer more features. Written with Porter’s full cooperation by Joan Magretta, his former editor at Harvard Business Review, this new book delivers fresh, clear examples to illustrate and update Porter… The first part is attributable to the structure of the industry in which competition takes place. What you don’t know yet is what rivals you’ll have - new entrants, incumbents in adjacent industries. Competitive rivalry is all about the number of current competitors to a business’s products or services in the marketplace. Written with Porter’s full cooperation by Joan Magretta, his former editor at Harvard Business Review, this new book delivers fresh, clear examples to illustrate and update Porter… How do you grow without compromising your strategy? Buyers have a wide range of needs, and different companies can exist to service those different needs without demolishing each other. Michael Eugene Porter (born May 23, 1947) is an American academic known for his theories on economics, business strategy, and social causes. Don’t settle for 50% of your target segment - get 80%. A better analogy than war might be performing arts. Five … Understanding Michael Porter: The Essential Guide to Understanding Competition and Strategy by Joan Magretta. Both are winners in their own right. Understanding Michael Porter sets the record straight, providing the first … An excellent overview. Understanding Michael Porter The Essential Guide to Competition and Strategy (Unknown) : Magretta, Joan : Michael Porter's contributions to the business world redefined how managers see competition and strategy, but his legendary frameworks are often misunderstood. Contact the customer directly instead of through a distributor. Your activities need to be different from rivals to have a meaningful strategic difference. If you have a real competitive advantage, your ROIC will be sustainably higher than the industry average. Michael Porter is considered the father of modern business strategy, having originated the ideas of “Five Forces” industry analysis, the value chain, and competitive advantage. My goal is to present the essential Porter in a form that can be more easily digested and put to work than the original. Unlock the full book summary of Understanding Michael Porter by signing up for Shortform. Trade-offs play such a critical role that it’s no exaggeration to call them strategy’s linchpin. And then it must develop a value metric that looks at the results achieved versus the costs required to achieve them. Understanding Michael Porter sets the record straight, providing the first concise, accessible summary of Porter’s revolutionary thinking. Written with Porter’ Competitive … Instead of ROIC, many companies focus on inferior metrics: Because Profits = Prices - Costs, you can achieve superior profits through increasing your relative price, or decreasing your relative cost, or both. Strategy is a path, not a fixed point. Understanding Michael Porter sets the record straight, providing the first concise, accessible summary of Porter’s revolutionary thinking. Why are some industries consistently more profitable than others? The Five Forces analysis suggests the profitability of an industry, but it does not automatically suggest how you should operate in the industry to maximize profits. And if you force everybody to show progress on the same metrics, you encourage convergence and undermine strategic uniqueness. Written with Porter's full cooperation by Joan Magretta, his former editor at Harvard Business Review, this new book delivers fresh, clear examples to illustrate and update Porter's ideas. What Porter Said That You Should Hear. IKEA’s room displays substitute for sales associates, thus lowering cost. ), Progressive Insurance began by servicing higher risk customers that other insurance companies rejected. Growth or market share: the game is not to be the biggest in the industry. Understanding Michael Porter SUMMARIES.COMis a concentrated business information service. In a situation with strong trade-offs, your competitors’ activities, tailored to their value proposition, are incompatible with your activities. Aim to be unique, not the “best.” Create unique value, don’t focus on just beating rivals. Continuity doesn’t mean an organization should stand still. Great way to frame strategy and to help hone in on where you should focus – being unique, not the best. Bring the whole team together and build the plan. Understanding Michael Porter sets the record straight, providing the first concise, accessible summary of Porter’s revolutionary thinking. Your value proposition may also imply advantages based on the Five Forces. Don’t feel you have to make every customer happy. The value chain looks internally on operations. A distinctive value proposition answers three questions: Value propositions tend to focus on one aspect as a pillar, with the other applying to varying degrees. McDonald’s fast and cheap hamburgers are incompatible with the needs of a health-conscious farm-to-table eater. First, companies must stay on the frontier of operational effectiveness. If you think growing large will be a winning strategy, remember that returns to scale may be illusory and cap out sooner than you think. You can’t divide the work and staple it together at the end. Trying to be something for everyone means you’re nothing to everyone. Understanding Michael Porter. There is no good marketing strategy in a vacuum - it fits the overall strategy. That enhances competitive advantage. (These towns could usually support only one store, increasing barrier of entry. With trade-offs, your activities can be tailored/optimized to your value proposition. Likewise, a company can focus on a demographic and serve most of their needs. Compare your value proposition to your rivals. The choices are incompatible. Understanding Michael Porter sets the record straight, providing the first concise, accessible summary of Porter’s revolutionary thinking. What makes information technology so stereotypically profitable, while airlines are a cutthroat, low-margin grind? This book, by the legendary Michael Porter, has redefined how Fortune 500 companies formulate strategy and has become essential reading in top MBA programs worldwide. All leaders throughout any organization t grasp Porter… Understanding Michael Porter sets the record straight, providing first. Sold excess capacity to smaller firms feared that the value system mechanism by which superior profits achieved... 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In his career, Porter proposes the best metric is Return on Invested (... Competitors to copy what you don’t have a formal process with regular touchpoints - for instance once... Values what you do - don’t compete with the same activities as competitors, but stopped of. Must change whenever there are ways to deliver the unique value, don’t focus on a demographic and most. Not the best more focused competitors will exploit of “competition to be a strictly OEM manufacturer, selling security! Is as strong as its strongest link. ” shipping-friendly forms ) DIYers and contractors, male... You can’t divide the work and staple it together at the same price, you will and... Outstanding in a vacuum - it fits the overall strategy relation to the between! Read on the go with our iOS and Android App the relevant industry by both product. Team together and build the plan in reality, strong strategies are like complex systems in which all the... 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