Who is Michael Porter

How was that strategy again? - "What is strategy" - Michael E. Porter

Note: The text provides a summary of the text "What is strategy?" By Michael E. Porter. However, we recommend reading the entire text, which can be found in the Harvard Business Review in the NOVEMBER – DECEMBER 1996 ISSUE in the original English language.

How do you start a topic that is so interlinked that there are several hundred books and opinions on it and which can hardly be put into a definition?

  • The best way to do this is to take a Harvard Professor of Economics, who is also one of the leading management throrists and a co-founder of strategic management - Michael Eugene Porter.

In the next few lines you will find a summary of the article "What is strategy?" By Michael E. Porter.

Developing a strategy means above all: Find out what makes the company's offering unique to customerswhich leads Porter to the basic questions: How can a company gain competitive advantage?

That sounds very banal at first, but at the same time this is exactly where the sticking point for many companies lies. The biggest mistakes of top management are not to stipulate clear lines, as well as trying to do everything at the same time and thus the competition is imitated in ideas and methods. These include, for example, management methods such as benchmarking, outsourcing, partnering, etc. These methods help progress, but not in a long-term way.

“The more managers try to achieve improvements on all fronts, the further they move away from their most important goal: to give their company a real sustainable competitive advantage.” ¹

The crucial question for Porter is thus: How can this situation be improved?

He offers five theses:

  1. Operational excellence alone is not enough
  2. Strategy is based on uniqueness
  3. Trade-offs are essential
  4. The strategy needs to be coordinated
  5. Managers have to think strategically

1. Operational excellence alone is not enough

With this thesis, Porter would like to express: Do the same things better than the competition. This means that costs are often driven up by various activities in the company. But competitive cost advantages only arise when certain activities are carried out more efficiently and better than the competition.

Operational excellence includes, for example, the production of better / high-quality products or the reduction of error rates.

But be careful: The closer a company in an industry approaches the upper limit of operational excellence, the less often a competitive advantage grows from it

Why? Competitors would now be able to quickly adopt the practices of operational excellence. In contrast, if you have a true and solid strategy, this cannot be adopted so quickly due to the time constraints and strongly interlinked and interlinked activities.

2. Strategy is based on uniqueness

The second thesis that Porter puts forward sounds banal and actually describes what all companies want to achieve: Uniqueness.

The Harvard Professor clearly states in his article that a strategy that is to lead to a competitive advantage must be DIFFERENT.

This means that a conscious combination of activities must be chosen that creates a unique and authentic mix of values ​​for the customers. This strategic positioning can be based on three categories:

  • differentiation
  • Cost leadership
  • Niche strategy

Porter is developing three variants for this:

(1) Product and service variant
In this variant, Porter refers to the market position, which can be based on the fact that a company only offers a part of the range of products and services customary in an industry. It is therefore clearly a matter of choosing product and service variants instead of customer groups.

(2) customer needs
Furthermore, it is also possible to position your company in such a way that most or all of the needs of a specific customer group are satisfied. In short: you want to do justice to a certain customer segment.

(3) Customer access
According to Porter, a third option is to segment customers based on how best to address them.

Important for this second point of the five theses: "A strategy creates a unique and valuable market position through a certain combination of offers." ²

3. Trade-offs are essential

Many companies find it difficult to make decisions, but according to Porter, this is one of the most important conditions if you want to run a stable company. According to Porter, compromises, i.e. corresponding trade-offs, are necessary as soon as activities do not fit together. It is therefore essential for the strategy to make a choice, e.g. cost versus quality.

It is often the case that companies try to pursue a two-pronged approach and therefore usually fail. A strategic position can only be held if compromises are made in comparison to other positions. As a result, it is important to make decisions, because if a company suddenly contains multiple value propositions, it appears to the customer as if the company is implausible, confusing and at the same time undermines its reputation.

In order to secure a competitive advantage and thus have a unique position in the market, a unique approach is required in terms of product design, skills, operating equipment, management system, etc.

“Strategy means making decisions in competition. The essence of the strategy is to decide what Not has to be done. ”³

4. The strategy must be coordinated

In the fourth thesis, Porter is concerned with the fact that the strategy aims to correctly combine the selected activities with one another, in contrast to the operational excellence that goes hand in hand with achieving excellent performance in just one activity or function.

There are thus three types of fits that are not mutually exclusive:

(1) First order fit
... every activity (function) must be consistent with the overall strategy

(2) Second order fit 
... activities support each other

(3) Third order fit 
... this goes beyond the mutual support of activities and aims at optimizing the operational performance as a whole

"The better the activities are coordinated, the more sustainable the competitive advantage."

5. Managers need to think strategically

In the last thesis, Porter talks about corporate management. He is of the opinion that managers live in the belief that the greatest threat to their company comes from outside, such as competition or technical innovations that they do not know how to deal with. However, the real threat does not come from outside, but from within. For many managers, a distorted perception of competition emerges due to management errors and the urge for more growth and profit. In doing so, companies should concentrate on consolidating their strategic position instead of wanting to continually expand it and affect themselves and thus the entire company.

What is part of the strategic agenda aims at ...
.... a unique position needs to be defined.
... to make clear trade-off decisions.
.... Activities of the organization / company must be coordinated.
.... constantly looking for ways to strengthen the company's position.

SAY YES TO: Discipline and Continuity
SAY NO TO: Confusion and half-heartedness

Now we are interested in: What are your views on this theory?
Can you think of an example? - If not, there will be a second part of this article in the next month with a selected series of examples.

Stay tuned and be interested.

Source:

¹ Porter, M. E. (2008). What is strategyHarvard Business Manager, P. 2.
² Porter, M. E. (2008, April). What is strategyHarvard Business Manager, P. 10.
3 Porter, M. E. (2008, April). What is strategyHarvard Business Manager, P. 12.

by Maria Jatzlau