Understanding Michael Porter by Joan Magretta
I DOUBT there is anyone who has attended a business school who is unfamiliar with the name Michael Porter.
I am also fairly certain that few have read his two most important works, Competitive Strategy and Competitive Advantage, due in no small measure to their intimidating size.
This is unfortunate, because a solid grounding in Porter will equip business leaders with a functional understanding of strategy and ensure they don’t mistake a mere plan or programme for the real thing.
The author, Joan Magretta, has done superb job of presenting the essence of Porter's ideas clearly and briefly and without trivialisation.
A good strategy is essential for earning superior profits relative to your industry, and is the reward for creating value for the customer that others cannot.
To the question of how to earn superior profits, the most common response is to commit to “being the best”. Porter challenges the “being the best” response, on the grounds that it is a recipe for profit erosion.
Being the best requires that you do what others are doing with heightened quality, speed, or whatever is the measure.
To achieve this you will have to pile on features (and increase costs,) use better inputs (and increase costs,) respond faster through increased staff or machines (and increase costs,) and so on.
The alternative is not to compete, simply not to play the game by the same rules, in other words to differentiate your offering.
However, in an environment of hyper-competition offering a product or service that others are not offering is simply to invite them to do the same. And we are back to the “being the best” race down the path of margin erosion.
To step out of the race requires answering a set of questions, the first of which is what customer segment should we serve, and which customers should we refuse to serve?
Enterprise Rent-a-Car overtook Hertz and Avis by defining who it would not be serving. Hertz and Avis’ traditional market is people away from home on business or on holiday.
Enterprise identified that a sizeable minority of rentals are to people in their home town when, for example, their car is in for a service, or after an accident, or when the children come home for school holidays.
Then there is the question as to which needs you are going to meet. The people Enterprise serves are often more price-sensitive than business travellers or holidaymakers because their insurer, who is sponsoring the car, has set the price it is willing to pay.
And there is the issue of convenience, which Enterprise addresses by the proximity of its sites to the customers.
Finally there is the question of the relative price you can charge. If the customer is “over-serviced” as when she is offered a feature-rich smartphone when she needs only a basic instrument, the price can be reduced.
Where the customer is “under-serviced,” as when the airline doesn’t offer a first class cabin, the customer may well be prepared to hire a private jet with enhanced luxury and convenience, at an enhanced price.
As soon as the industry sees your success, you may reasonably assume you will have companies vying for the same valuable customers and you will be back in the profit eroding “race to be the best” cycle.
It is to avoid this that Porter introduced the notion of a tailored “value chain”.
Enterprise has a value chain that Hertz and Avis simply cannot copy without losing the lucrative business they already possess. Enterprise operates from small offices spread across a metropolitan area, not from extremely high priced real estate around airports, thereby reducing its costs.
Enterprise keeps its cars longer than Hertz and Avis because its customers are less demanding, further bringing down costs. A well-constructed value chain has many components that together make it extremely difficult for rivals to imitate.
A further strategy essential is what Porter calls “fit”, the way in which all the components of the offering come together to create real value to the customer.
Zara, the Spanish fashion retailer, is designed to get the latest styles into its stores fast and at a cost lower than is expected for the latest fashion. Where other fashion retailers get their goods to the stores in three months, Zara does it in two to four weeks - enabling it to release a hundred collections a year.
It have its own trend spotters at shows and in nightclubs and its own designers, rather than engaging high-priced design houses. It does its own manufacturing in Europe for speed and has the clothes delivered, hung and ticketed to avoid delays when they arrive at the stores.
New goods come in twice a week in limited supply that sends the message: buy now or miss out. Togethe,r the “fit” creates a hugely successful offering that caters to the fashion-conscious in all the most desired ways.
Porter’s offering lies in the theory of strategy, not its practice. He has no methodology for arriving at a good strategy. But I am reminded of what my philosophy professor pointed out – there is nothing as practical as good theory.
Readability: Light --+-- Serious
Insights: High +---- Low
Practical: High ----+ Low
* Ian Mann of Gateways consults internationally on leadership and strategy.