#44 Creating Value, Understanding Michael Porter

Good Strategy

The best way to check if a strategy is good is to check if it has the following elements:

• A distinctive value proposition

• A tailored value chain

• Trade-offs different from rivals

• Fit across value chain

• Continuity over time

The two core elements of strategy:

• Choosing what kind of value you will offer your customers (competing to be unique)

  • This is the outward facing element of strategy that is looking at the demand side of the business

• Tailoring your value chain to deliver your value proposition

  • This is the inward facing element of strategy that is looking inwards at the operations - the supply side of the business

Distinctive Value, Distinctive Value Chain

The first test of a strategy is whether your value proposition is different from your rivals. If you are trying to serve the same customers and meet the same needs and sell at the same relative price, then you don’t have a strategy.

The value proposition must be picked very deliberately, it can be arrived at by answering the following questions:

• Which customers are you going to serve?

• Which needs are you going to meet?

• What relative price will provide acceptable value for customers and acceptable profitability for the company?

Companies usually pick one of the above elements first while deciding on their value proposition - customers, needs, or relative needs (under-served or over-served customer)

• If you pick customers first, targeting customer groups that are overlooked or avoided by the industry will be the typical choice

• If you pick needs first, your product will appeal to a mix of customers who might defy traditional segmentation

• If you pick relative price first, you will typically target over-served or under-served customers

  • If customers are over-served, you will provide customers with a lower relative price

  • If customers are under-served, you will provide customers with a higher relative price (for additional/distinctive needs that the customer values)

The second test of strategy is whether your distinctive value proposition is being delivered via activities that are not performed by rivals. The essence of strategy and competitive advantage lies in the activities, in choosing to perform activities differently or to perform different activities from those of rivals

To establish a competitive advantage, a company must deliver its distinctive value through a distinctive value chain. If the same value chain can deliver different value propositions equally well, then those value propositions have no strategic relevance.

Choices, New Positions, and Generic Strategies

Choices in the value proposition that limit what a company will do are essential to strategy because they create the opportunity to tailor activities in a way that best delivers that kind of value.

"Strategic competition" is the process of discovering new positions that woo customers from established positions or draw new customers into the market. Looking for new ways to segment customers or to serve unmet needs is one starting point. But the value chain—the unique set of activities your company performs—is an equally valid starting point.

Porter identified a set of generic strategies—focus, differentiation, and cost leadership. Focus refers to the breadth or narrowness of the customers and needs a company serves. Differentiation allows a company to command a premium price. Cost leadership allows it to compete by offering a low relative price. In addition to the generic strategies, effective strategies integrate multiple themes in a unique way