Since I thoroughly enjoyed 7 Powers by Hamilton Helmer, I wanted to compare it against the views of the giant of strategy - Michael Porter. I'll be reviewing each chapter of the book "Understanding Michael Porter" by Joan Magretta.
What is the book about?
The book provides answers to the following questions
Why are some companies more profitable than others?
Why are some industries consistently more profitable than others?
Why are some countries or regions more successful than others?
Provides the basic principles and frameworks for strategic thinking
Helps you recognize good or bad strategy
Rigorous and clear mapping between your strategy and your organization's financial performance
The book is divided into two parts: part one is focused on competition and part two on strategy. Chapter 1 focuses on the common misconceptions of what competition is and how it leads to bad strategy
Strategy explains how an organization, faced with competition, will achieve sustainably superior performance
One of the most common misconceptions about competition - is the pursuit to be "the best" among the competitors. This leads to what Porter calls competitive convergence. As all competitors set out to be the best, it leads to a destructive, zero-sum competition that no one can win. Examples of industries that have suffered from this type of competition - airlines, telecom industry (in India).
When all rivals compete on the same dimension, no one gains a competitive advantage. When all companies pursue the same strategy (to be the best) - customers, suppliers, and employees often become collateral damage as companies are squeezed for resources and forced to cut costs.
Porter also warns about the dangers of pursuing "economies of scale" without adequate homework and research. The most popular version of this strategy is to become Number 1 or 2 (in market share or volume) in your industry or get out. He cautions that economies of scale are exhausted at relatively small share of the industry. Hence, it is better for companies to aim to become "big enough". Most industries exhibit multiple scale curves, each based on serving different needs.
But isn't companies focusing on building "the best" products for "the best customers" good for customers? While this strategy may result in lower prices for “the best” customers, it may result in lower choice. When choice is limited, value is often destroyed. As all companies focus on "the average" customer's needs, diversity in the needs of customers gets ignored. Hence, some customers may be overserved and some may be underserved.
The solution offered by Porter to overcome the common misconceptions about competition "compete to be unique". Strategic competition means choosing a path different from that of others. It's about the uniqueness of value that you create and how you create it. When a company pursues this strategy it's success does not require its rivals to fail. It is positive-sum competition. Competing to be the best feeds on imitation. Competing to be unique thrives on innovation.
Competition is multi-dimensional and strategy is about making choices along many dimensions, not just one.