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Michael Porter: Competitive Strategy

Of all the strategic thinkers we have covered (like Igor Ansoff, Kenichi Ohmae, and Porter’s student, Kathryyn Rudi Harrigan), Michael Porter deserves a special place. His 1980 book, Competitive Strategy, transformed thinking, moving us from the pre-Porter world of strategic thinking dominated by Ansoff, to the post-Porter world that he still dominates.

Porter is an intellectual and an influencer who does not covet the easy quotability of some of his contemporaries. But the rigour of his analysis has made him all the more sought-after. His books have sold in the hundreds of thousands, and his speaking fees are legendary.

Michael Porter
Michael Porter

Short Biography

Michael Porter was born in 1947, in Michigan, and went to Princeton to study for a BSE in Aeronautical Engineering in 1969. He graduated top of his class and was inducted into the two most prestigious honor houses. He then shifted his focus to business, and went to Harvard Business School, where he received an MBA in 1971 and a PhD in Economics in 1973. From there he joined the faculty.

He remains at Harvard today, as a University Professor, and also Founding Director of Harvard Business School’s Institute for Strategy and Competitiveness, which he founded in 2001 to further his work and research.

Porter’s breakthrough came with the 1980 publication of Competitive Strategy. Other significant yet accessible books are The Competitive Advantage of Nations (1990) and the 1998 article and essay collection, On Competition. But these are among 15 other successful books and article collections.

But what you are interested in are Porter’s big ideas…

Michael Porter’s Big Ideas

Before Porter, Igor Ansoff dominated thinking on corporate strategy. His approach boiled down to choosing your market, matching your resources to meet the market’s demand, and then improving your competitiveness to increase your market share.

Michael Porter did not reject these ideas. Rather, he opened them out, approaching strategy from the perspective of the whole industry and then, later, as a national endeavour. He considered that earlier strategic thinking had become confused with simple (ahem) operational effectiveness. He argued that improving operational processes merely levelled out competitors, rather than giving them a differentiation that led to competitive advantage.

Let’s survey five big ideas that Michael Porter has given us. All remain core parts of any business education.

Primary and Secondary Activities, and the Importance of the Value Chain

Porter divided corporate activities into Primary Activities and Secondary Activities.

Primary Activities are the value chain from inbound materials to production operations, to outbound goods and their distribution, to the ‘far end of the value chain‘, marketing and sales, to customer care and after sales services. Here, Porter argued, lay the ground for competitive advantage. The key task is to integrate these into one value chain.

Secondary Activities are the business support functions, like IT, HR, Procurement, Facilities Management, and Finance. These cannot create competitive advantage They can merely enable efficiency, or act as a drag on the business.

Porter’s Five Forces

Corporations sit in a competitive environment, which creates five forces.

Michael Porter's Five Forces
Michael Porter’s Five Forces

Porter’s current view is that a company must aim to use these forces to re-cast the rules of its industry, in its own favour.

Sources of Competitive Advantage, and the Three Competitive Strategies

Porter argued that there are two sources of competitive advantage:

  1. Cost – being able to sell the same products or services at a lower price than your competitors, whilst maintaining profit margins
  2. Differentiation – being able to offer products and services which your customers want, but that your competitors cannot (yet) offer

This leads him to his three competitive strategies:

  1. Cost leadership – build the capability to produce at a lower cost than anyone else
  2. Differentiation – find a new product or service, or enhance what you offer to make it different
  3. Niche focus – find a profitable niche, and dominate it

Recently, we see competitors dominating their market with a fourth strategy, based on a third source of competitive advantage: deep loyalty. How does Apple dominate? Not by offering cheaper products, certainly. Although their supply chain efficiencies mean that their margins are exceptional.

And, some would argue, not by differentiation. Whilst they often lead for a short time here, their rivals also innovate, and certainly catch up quickly. Is there much a Mac can do that a PC cannot? Is there much an iPhone can do that a Samsung cannot?

And a company with as many and varied customers as Apple cannot truly be said to serve a niche.

No, I believe the source of Apple’s current dominance is largely the loyalty of its customer base, built on historic innovation, differentiation in multiple niches, and a reputation for excellence.

Diversification

Like Ansoff before him, Porter sees diversification as a shrewd strategy that spreads a corporation’s risk. This maybe through product development, or business acquisition.

In deciding how to diversify, Porter proposes three tests:

  1. Does the new industry, product set, or niche offer attractive returns on investment? Is there the opportunity to build differentiation or cost leadership?
  2. Is the cost of entry proportionate to the likely returns? If not, the risks are too high.
  3. Does the acquisition or the new venture leave the parties better-off? This is basically Ansoff’s concept of synergy.

The National Competitive Environment

In The Competitive Advantage of Nations, Porter fully articulated a line of thinking that placed national conditions at the heart of corporate success. A strong home base with good infrastructure and healthy competition grows successful global companies. Porter’s Diamond Model sets out four factors that affect a nation’s industries.

Michael Porter's Diamond Model
Michael Porter’s Diamond Model

Michael Porter on Competitive Strategy

An old, but excellent video of Porter describing some of his main ideas.

You might enjoy the Strategy Pocketbook

… and the following earlier Pocketblogs:

 

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Henry Mintzberg 2: Management Thinker

This is our 250th weekly Management Pocketblog.
We’re looking forward to the next 250!

In last week’s blog, we started our exploration of Henry Mintzberg, Gadfly Generalist. In this second blog, I want to examine two other aspects of his work: the way organisations are structured, and how they think strategically. But first, I feel the need to add in, gratuitously, another of Mintzberg’s more memorable quotes.

Mintzberg Delayering

Mintzberg on The Structure of Organisations

Mintzberg has visited this topic twice: in his 1979 book, The Structuring of Organisations, and then again, in 1989, in Mintzberg on Management. His earlier work identified five archetypical organisational structures or types, which he later revised to six.

  • Entrepreneurial Organisations are small, informal, with loose allocation of roles, but frequently strong leadership from a single chief executive.
  • Machine Organisations are excellent at repetitive tasks like manufacturing, placing efficiency of process at their heart, and formalising everything.
  • Diversified Organisations create a central administrative function to serve a range of operating units that are more or less autonomous. The degree of autonomy seems to vary in cycles with the current cycle creating a high degree of centralisation. See the earlier article, Kenichi Ohmae: Irrational Strategy.
  • Professional Organisations might also be called knowldege organisations. They use the skills and knowledge of their highly trained workforce to deliver fairly standardised services.
  • Innovative Organisations are flexible, informal and multi-disciplinary, allowing them to adapt and innovate. Mintzberg saw these as increasingly succeeding over competitors in the future.
  • Missionary Organisations have a clear mission that provides the basis for strategic choices and the motivation for employees.

Mintzberg on Adhocracy

I am going to make more of this than it may strictly deserve, as it is just one of very many topics on which Mintzberg writes. But it is one that interests me, especially with the emergence in recent years of the concept of holacracy, which seems a natural successor.

The term was, I think, first coined by Warren Bennis and then taken up and popularised by Alvin Toffler in his book, Future Shock. An adhocracy is a way of governing an organisation, not through formal structures, but through informal networks in which individuals take on the roles that are needed at the time. Such organisations are fluid and undocumented and unstructured knowledge has a high value.

Mintzberg developed these ideas, advocating small scale, temporary organisations coming together within the larger whole, to deliver a project, or one product or service, or to serve one customer. He saw two models:

The Operational Adhocracy, which works on behalf of it clients, like service businesses such as consulting

The Administrative Adhocracy, which comes together to serve its parent organisation.

Both of these models are excellent at creating adaptability and reacting to changes in circumstance. Consequently, both are poor at strategy building, because members have little investment in the adhocracy’s long-term development.

Mintzberg on Organisational Strategy

Mintzberg has made several influential contributions to thinking about organisational strategy too. His most notable influence has been, like Ohmae, to advocate non-linear, creative thinking over formulaic, analysis-driven strategy development. Once again (see last week) Mintzberg’s HBR article on the subject is very widely read and, once again, the enterprising reader could find a copy notwithstanding HBR’s copyright if you chose to. His books on the subject include: Rise and Fall of Strategic Planning (1994), The Strategy Process (1996), Strategy Safari (1998), and Strategy Bites Back (2004). Many of these are in revised editions and remain valuable today.

He sees three major pitfalls in traditional strategy making and rejects any assertions that our volatile, uncertain times are anything special – try telling that to people in Stalingrad during the Second World War, he says. All people at all times have seen their world as complex and uncertain.

Mintzberg’s three pitfalls are:

  1. Assuming that we can predict discontinuities. We tend to assume, implicitly, that the future will flow from the past and that changes will arise from trends. This is a theme that Nassim Nicholas Taleb has recently made his own, with his best selling book, The Black Swan.
  2. Planners are often detached, in the ivory planning towers, from daily realities. They are focused on the hard data and its analysis and miss out on the soft information that would alert them to big shifts. This says that operational managers need to be highly engaged in any strategic work.
  3. A belief that formal strategy development can follow a linear process. Instead, he argues, creative, divergent thinking is needed, which can make links outside of the logic-chain, subverting established categories and dogmas.

So, to end this exploration of Mintzberg’s thinking, one last, telling quote.

‘The real challenge in creating strategy lies in detecting the subtle discontinuities that may undermine a business in the future. And for that there is no technique, no program, just a sharp mind in touch with the situation.’


Pocketbooks you might enjoy

I am a little loath to include a book on the process and tools of strategy, but it is a good book and I have included it alongside others on creative thinking!

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Clayton Christensen: Disruptive Innovation

Clayton Christensen currently* styles himself as the ‘World’s Top Management Thinker’.  I don’t propose to either challenge or endorse his claim, but let’s at least take a look at his thinking and see what the source of that extraordinary claim is. It is about ‘disruptive innovation’ – the idea that new entrants to a market, with new ideas, can disrupt the market. Established competitors – even the best managed ones (particularly those, Christensen argues) will fail.

I confess I don’t have any of Christensen’s books on my shelves, but I do have ‘The Mind of the Strategist‘ by Kenichi Ohmae: ‘But to break out of a stalemate, the strategist has to take drastic steps.’  Christensen’s idea is not new: what he does is examine it in great depth.

Clayton Christensen

Brief Biography

Christensen was born in Salt Lake City in 1952, and took his first degree, in economics, at Brigham Young University. He then wen to Oxford as a Rhodes Scholar, to study applied econometrics, returning to the US to take Harvard MBA. He joined prominent strategy consulting firm Boston Consulting Group, did a spell in the Reagan White House, within the Transportation Department, and co-founded a high-tech materials science business, CPS Technologies Corporation, in 1984. He returned to Harvard in the mid-1990s to do a doctoral thesis in Business Administration, from which he joined the faculty. He is now Kim B. Clark Professor of Business Administration at the Harvard Business School; and is regarded as one of the world’s top experts on innovation and growth.

In 2000, Christensen founded a consulting firm called Innosight, which applies his theories of disruptive innovation to help companies create new growth businesses. In 2007, he also founded Rose Park Advisors, an investment firm that seeks to invest in disruptive companies. His Innosight Institute is a non-profit think tank with a mission  to apply his theories to social problems such as healthcare and education.

He has written a number of books, which are discussed below.

Christensen’s Ideas

The Innovator’s Dilemma: When new technologies cause great firms to fail

The Innovator’s Dilemma was published in 1997. Its primary thesis is that large, well-established businesses in stable markets are frequently the victims of disruptive strategies from new, low-end competitors, seizing their markets with a lower cost, often technologically-enabled, service or product offering. Christensen argues that well-managed businesses are doomed to fail eventually, and that 80% of the corporations studied in business schools therefore teach students the secret of eventual failure.

The Innovator’s Solution: Creating and sustaining successful growth

The Innovator’s Solution was published in 2003. It built upon its predecessor and set out to answer the threat of disruptive insurgency by smaller upstarts. Christensen set out three ways:

  1. the corporation can spin-off a new, smaller, more agile, but well managed and resourced upstart of its own
  2. the corporation can acquire an existing innovative upstart business and nurture it
  3. the corporation can create a sand-box business i=unit, free of existing constraints, within which to build its own upstart

Seeing What’s Next: Using the theories of innovation to predict industry change

Seeing What’s Next was published in 2004 and took the story one step further, identifying three ways to spot the trends that will lead to disruption:

  1. identify the signs and portents that change is coming
  2. analyse the competitive environment and the conflicts it creates
  3. understand your strategic choices

Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns (2008), and The Innovator’s Prescription: A Disruptive Solution for Health Care (2009) followed. These extended Christensen’s ideas into the realms of education and healthcare respectively. He returned to the more generic thinking with…

The Innovator’s DNA: Mastering the five skills of disruptive innovators

The Innovator’s DNA was published in 2011 and  sets out the five skills we need to develop if we want to be innovators:

  1. Associational thinking – synthesising new ideas by combining ideas and knowledge from multiple sources
  2. Questioning – asking the questions that less innovative minds fail to recognise
  3. Observing- noticing the world around them
  4. Networking  – seeking new people with new ideas, and testing out their own ideas with a wide variety of people
  5. Experimenting – seeing pilots, prototypes and experiments s the way to learn, develop and innovate more

It is important to note that, although Christensen is the leading thinker behind all of these ideas (as far as an outsider can tell), on all but the first of the books listed above, he collaborated with co-authors.

Postscript

Recently, there has been a somewhat public spat between New Yorker journalist Jill Lepore and Clayton Christensen. Lepore wrote a highly critical analysis of the idea of disruption in general, and of Christensen’s work in particular: ‘The Disruption Machine: What the gospel of innovation gets wrong‘. Subsequently, Drake Bennet interviewed Christensen for Business Week and published a lengthy article with Christensen’s response: ‘Clayton Christensen Responds to New Yorker Takedown of ‘Disruptive Innovation’‘.

Make your own judgement.

 


 

* On his website, 23 June 2014.
The World's Top Management Thinker

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Kenichi Ohmae: Irrational Strategy

Kenichi Ohmae is notable as the first internationally-known Japanese corporate strategy thinker, for fresh thinking on how corporate strategy thinking should be conducted, for the essential concerns of a corporate strategy, and for one of the first people to do some serious thinking about the strategies that need to arise from modern globalisation of commerce.

He has an awesome intellect, and holds a PhD (like Karen Stephenson, whom we met recently) not in business, but in another topic: in Ohmae’s case, in Nuclear Engineering.  Like me, he is a physical scientist at heart, but if you think that makes him a pure rationalist, you’d be wrong.

Kenichi Ohmae

In Ohmae’s best known book, The Mind of the Strategist, he sets out how Japanese business went about creating corporate strategy, arguing that the strategy creation process should not be a rigid, linear process, but instead needs to involve creative and intuitive thinking, flowing from a structured analysis. His book is filled with powerful tools to help us do this analysis, some of which were familiar from earlier works. What was new was the way he set out that Japanese companies go about the process, placing the customer at the centre of their thinking. Central to his approach is ‘The Strategic Triangle’ – or the three C’s.

Kenichi Ohmae's Strategic Three C's

Brief Biography

Kenichi Ohmae was born on the southernmost Japanese island of Kyushu, in 1943.  He studied chemistry as an undergraduate and then nuclear physics at the Tokyo Institute of Technology, before moving to US to earn his doctorate in nuclear engineering at MIT. His first job was a brief one, at Hitachi, but he quickly found his natural milieu, moving two years later to McKinsey & Company in 1972.  He stayed there for 23 years before stepping down to run for public office as Governor of Tokyo. When he was beaten, he moved into academic life and private consulting. His first book, The Mind of the Strategist, was written in 1975 and his other particularly influential book, on globalisation, The Borderless World, came out in 1990. In total, he has written eight books and contributed to others.

His Ideas

Central to Ohmae’s early work is the strategic triangle of corporation, customers, and competition, and his injunction that we place customer focus at the heart of our strategic thinking. Another key point of his, against which many global corporations have swung in recent years, is the criticality of strategic business units. These are quasi autonomous businesses within a large corporation, capable of serving a discrete customer set with products or services that they need. He argued that this is where the corporation is closest to its customers, so it must give these SBUs freedom to operate as they see fit, in service of their customers. The role of the strategist in this is to match the capabilities of the corporation to the needs of the market. Sadly many of the global corporations I work with now see fit to centralise so many functional decisions that SBUs are no longer able to serve their customers as they would like.

Ohmae identified four sources of competitive advantage:

  1. Concentrate resources on the business’s key factors for success
  2. Exploit the difference between your business and that of competitors to harness relative superiority
  3. Develop a disruptive strategy to shake up the status quo with an aggressive initiative
  4. Innovate to create change in your marketplace and exploit these strategic degrees of freedom

Ohmae’s later work, starting with The Borderless World, focused on the effects of globalisation. He advocates two more C’s: Country (nation states) and Currency (the impact of exchange rates and volatility). These become ever-more important considerations in a corporation’s strategy. It is the attempts to leaven the risks and harness the opportunities of these factors that have lead major corporations to subordinate Strategic Business Units to global-level corporate strategies and business planning.

 


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