Michael Porter: What is Strategy?

Michael Porter: What is Strategy?

Most managers mistakenly believe that the steps taken by a company in a particular direction represent its strategy. For example, expanding internationally, outsourcing production, etc. These goals and objectives are not strategy. They are the cumulative steps taken over time in pursuit of strategy. So, what is strategy? According to Michael E. Porter, Professor at Harvard University and author of Competitive Advantage (The Free Press, 1985), “the essence of strategy is being unique.” Strategy answers: How are we going to be unique? How are we going to have an advantage? How are we going to sustain that advantage?

The starting point for creating strategy is industry analysis. Porter recommends asking: What is your industry? What are its boundaries? What drives competition? How is the industry changing? What impact does change have on your strategy? Porter believes that the primary purpose of strategy is “alignment.” Alignment gets people – employees and partners – to make good choices and reinforce each other’s choices because everyone is working toward a common competitive advantage. Accordingly, he developed the “five competitive forces” as a holistic way of thinking about and creating strategy. The five competitive forces are:

1 – Bargaining Power of Buyers.  Do customers have the ability to easily switch to the competition?  If yes, the company will face pricing pressure.  Companies can combat by making switching costs high.  For example, changing a CRM system from Oracle to Salesforce.com.

2 – Bargaining Power of Suppliers.  Do suppliers have the ability to put pricing pressure on the company?  If yes, the company’s profitability will continually be under pressure.  For example, AMD and Intel have leverage on high-tech manufacturers that need their components.

3 – Rivalry Among Existing Competitors.  Does the company have significant competition?  If yes, the company will face pricing pressure from both competitors and customers.  Companies can combat through differentiation.  For example, Zappos’ exceptional customer service.

4 – Threat of New Entrants.  Profitable markets attract competition.  Competition puts pricing pressure on products and services.  Companies can combat by implementing barriers to entry.  For example, the network effect caused by Facebook’s 500M users creates a barrier for companies looking to create similar offerings.

5 – Threat of Substitute Products and Services.  The existence of products or services outside common boundaries increase the likelihood that customers will switch to alternatives.  For example, Apple’s iPhone was outside the common boundary of traditional cameras offer by companies like Canon.

The key to effective strategy creation and implementation is that everyone understands it and the why behind the chosen direction.  The five competitive forces help make strategy less “ivory town” and more “real” for people.  Above all, effective strategy execution (emphasis added) is what really counts!

All contents copyright © 2012, Josh Lowry. All rights reserved.

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One Response to Michael Porter: What is Strategy?

  1. Michelle Rixon says:

    I am thoroughly enjoying your blog. I too am an aspiring blog blogger, but I am still new to everything. Do you have any suggestions for rookie blog writer? I would definitely appreciate it.

    Like

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