Michael Porter, Competitive Advantage (1985)
American Harvard Business School professor and leading expert on strategy and the competitive advantage of
companies and countries (pictured right).
His reputation is based on this book and two others:
- Competitive Strategy (1980), which introduced his five forces affecting industry
Michael Porter in the Management
What increases profits?
1. Industry attractiveness
The profitability and competitiveness of the company’s industry.
These are determined by the five industry forces, discussed by Porter in his previous book,
Competitive Strategy (1980):
- likelihood of new entrants (into the industry).
- intensity of rivalry between competitors.
- bargaining power of customers.
- bargaining power of suppliers.
- threat of substitutes (e.g. trains in the car industry).
For more detail see Industry
analysis in the Management Topics section
2. Sustainable competitive advantage
Continually providing better value to customers than competitors through:
- generic strategies (see below)
- maximizing value to customers at each stage of the company’s value chain (see
1. Cost leadership
Being the lowest cost (and price) producer in the industry.
Providing customers with something better and different - for
3. Focus (or segmentation)
- cost focus - being the lowest cost (and price) product to a
particular market segment.
- cost differentiation - selling a differentiated product to a
particular market segment.
Why is being “stuck in the middle” bad?
This means having a strategy that isn't focused on one of the
generic strategies outlined above.
An organization will usually fail, if this happens, because the high costs of differentiation
A firm can normally only achieve either cost leadership
But there are three situations where they can be achieved simultaneously:
a) poor performance of competitors
(because they are stuck in the middle).
b) a firm’s cost advantage resulting from:
- its large market share (so reducing the costs of differentiation as a proportion of
sales) , or
- the exploitation of exclusive relationships with firms from other
c) a major innovation
(that only the firm possesses).
The value chain
Successful companies maximize value to
customers at each stage of the company’s “value chain”:
The receipt, storage and distribution of supplies (or inputs) required for operations.
Converting inputs into the final product.
3. Outbound logistics
The collection, storage and distribution of products to buyers.
4. Marketing and sales
Persuading people to buy the products and making it easier for them to do so.
These five primary activities are supported by four support activities:
1. Human resource
(hiring and motivating employees).
(research and development).
(support managerial functions like finance and planning).
Within each primary and support activity, there are three further activities:
(directly creating customer value).
(helping to create customer value)
c) quality assurance
(getting quality right).
Key quotes on competitive advantage
Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the
firm’s cost of creating it.
Industry leadership is not a cause but an effect of competitive advantage
Key quote on business
Competition is at the core of the success or failure of firms.
Key quote on
Superior value stems from offering lower prices than competitors for equivalent benefits or providing unique
benefits that more than offset a higher price.