- February 10, 2021
- Posted by: Ramkumar
- Category: Strategy
Why Porter’s Competitive Strategy is more relevant now than ever?
One of the biggest and most consequential business questions is why some companies are more profitable than others? When i look at successful companies globally, they have a clear strategy of choosing what not to do. In this post, i share my insights on why Porter’s competitive strategy is more relevant now than ever. Porter’s framework helps you recognize a good (or bad) plan and understand the distinction between a solid design and the latest management trend.
Post-COVID19, we are in the midst of enormous economic upheaval in many industries and countries worldwide. Amidst that upheaval, the strategy itself has come under fire: some argue that execution, not process, is the only path to competitive success. I have witnessed many experts claim that even if an organization creates a competitive advantage, it cannot persist in today’s hypercompetitive world, so why worry? These are serious misunderstandings. Understand the fundamental Porter, and you will realize how companies sustain competitive advantages for decades and why strategy is crucial in turbulent and uncertain times. Porter’s framework helps articulate a rigorous and exact mapping between your strategy and your organization’s financial performance, thus laying the strategy field’s foundation.
What constitutes an effective strategy?
An effective strategy should result in superior economic performance. Thus a good strategy should have:
- A distinctive value proposition
- A tailored value chain
- Trade-offs different from rivals
- Fit across the value chain
- Continuity over time
Identifying the particular kind of value, you will give your customers is the core of competing to be unique. Your value chain must specifically get tailored to deliver your value proposition to enjoy a sustainable competitive advantage. A value proposition effectively delivered without a tailored value chain will not produce a sustainable competitive advantage. If all competitors offer the identical way, distribute the similar way, service the same way, they compete to be the best and not competing on strategy in Porter’s terms.
A Distinctive Value Proposition
The value proposition looks outward at customers at the business’s demand side. A value proposition reflects alternatives about the particular kind of value the company will offer. To articulate the right value proposition, we need to answer three fundamental questions:
- Which customers are you going to target?
- Which needs do you agree to satisfy?
- What relative price will present good value for customers and adequate profitability for the company?
In an industry, there usually are discrete groups of customers or customer segments. A value proposition should aim at serving one or more of these segments. For some value propositions, determining the customer comes first. That alternative then points directly to the other two legs of the triangle: needs and relative price.
Determining the need the company will serve arises from the distinct features of a product or service that it will provide. Typically, value propositions based on needs attract a mix of customers determined by the common need they share at a given time.
There are value propositions that target customers who are overserved and charge customers highly for their services. A company can gain these customers by reducing redundant costs and satisfying “just enough” of their needs. At the product level, think about distinguishing between a bare-bones cell phone and a more costly, feature-laden smartphone. Where customers get overserved, the lower relative price is usually the principal factor.
A tailored value chain
Porter explains that a unique value proposition will not turn into an effective strategy unless the most suitable set of activities to deliver it is distinct from competitors’ activities. Insight into customers’ needs is essential, but it’s not sufficient. The core of strategy and competitive advantage lies in the activities, deciding to perform activities differently or perform different activities.
Trade-offs different from rivals
Competitive advantage depends on addressing choices that are distinct from those of competitors, on making trade-offs. Trade-offs play such a crucial role that it’s no hyperbole to describe them the strategy’s linchpin. They hold a strategy together as they add to both building and sustaining competitive advantage.
Trade-offs make choices about what not to serve as crucial as alternatives of what to serve. Determining which needs to serve and which products to offer is core to detailing a strategy. However, it is vital to choose which needs you will not serve and which products, features, or services you won’t provide. And then comes the tricky part—clinging to those decisions.
I have witnessed many firms add functions and features to their products, assuming this will expand their customer base and boost sales. The “more is better” psychology is difficult to resist. This thinking is the slippery slope that drives a company to flounder. When you attempt to offer something for everyone, you tend to loosen the trade-offs that underpin your competitive advantage. Wherever you discover an organization that has maintained its competitive advantage over many years, you can be sure that the business has retained its critical trade-offs against endless onslaughts.
Fit across the value chain
Companies cannot achieve competitive success by one core competence, the one job you do excellently. The paradox here is that the right strategy doesn’t rely on just one thing: making one choice. Nor do they typically emerge from even a range of independent choices. Right strategies depend on the relationship among many things, on making interdependent choices. Fit increases the competitive advantage by reducing costs or increasing customer value (and price). Fit additionally makes a strategy more sustainable by raising barriers to imitation. A good fit should enable multiple functions like marketing, production, service, and information technology (IT), aligned with its value proposition, and each adds incrementally to its principal themes. Further, each function should complement one other, thus bringing out a real synergy effect. Fit indicates that the whole means more than any individual part, that many elements collectively generate value, not merely a few elements in isolation. Whether it is Southwest or Amazon, or Netflix, value arises not from “core competencies” only but from how they get stationed in the company’s positioning.
Continuity over time
Without continuity, organizations cannot build a competitive advantage in the first place. We are critical of companies that do not change. However, companies that change their strategies often fail. Having a continuity to the strategy promotes the right kind of innovation. Continuity strengthens a company’s identity—it strengthens a company’s brand, prominence, and customer relationships. Continuity assists suppliers, channels, and other external parties to add to a company’s competitive advantage. Continuity promotes improvements in specific activities and fits across activities; it enables an organization to develop unique capabilities and skills tailored to its strategy.
According to Mark Twain, Classics are works that everybody wants to read, but nobody desires to read. Porter’s frameworks are a classic that offers a distinct line of sight between their decisions and their performance. Tackling Porter’s work can be a bit like undertaking a serious exercise regimen. However, in my experience, it will be good for you, even transformative.