Book review: On Competition by Michael E Porter

Every strategist will be familiar with Michael E. Porter. His book, "On Competition," is a seminal work that explores the complexities of competitive strategy and industry dynamics.

Although the book is old, its contents provide foundational knowledge for anyone interested in strategy and competitive positioning for their company, brand, country, or location.

Through decades of study, Porter examines how competition creates value and necessitates strategic approaches for organizations to deliver superior value to customers.

As global competition intensifies across all sectors, including arts, education, healthcare, and philanthropy, organizations must efficiently meet or exceed customer needs to thrive.

The book is organized into five parts:

Core concepts of competition and strategy: This section discusses the foundational principles of competitive strategy for companies, emphasizing industry competition, competitive advantage, and strategic positioning. It highlights the importance of understanding competition within individual businesses to inform broader corporate decisions like diversification.
Competitiveness of locations: Explores how location influences competition, arguing that local environments significantly impact the prosperity of companies and nations. It challenges the notion that globalization diminishes the importance of location, emphasizing the need for a new relationship between businesses, governments, and local institutions.
Competitive solutions to societal problems: Applies competition and value creation frameworks to societal issues such as environmental sustainability, urban poverty, and healthcare. Porter argues that economic principles and competition can offer sustainable solutions to these problems, creating win-win opportunities for society and businesses.
Strategy, philanthropy, and corporate social responsibility (CSR): Discusses how strategic principles can enhance the effectiveness of philanthropy and corporate social responsibility. Porter stresses that philanthropic efforts and corporate social initiatives should create true social impact and align with business strategies to be effective.
Strategy and leadership: Examines the role of leadership in achieving superior value creation. Porter highlights that developing a strategy is a crucial leadership act, especially in large organizations, where leadership roles are subtle and indirect. Effective leadership aligns the organization around a common purpose and direction.

Porter provides a comprehensive and insightful discussion on various aspects of strategy, the role of advancing technology, and its impact on an organization’s competitive strategy.

Unlike most strategy books that discuss frameworks individually, throughout the book, the author integrates various frameworks to help readers understand how to analyze their industry and make competitive and strategic decisions.

Key frameworks / models

As with any strategy and CI book, On Competition offers insights into multiple frameworks. The key ones discussed are:

The five competitive forces that shape strategy

A chapter is dedicated to this holy-grail framework on strategy. Expanding on his original Harvard Business Review article, Porter provides a detailed discussion of each factor in the Five Forces model that shapes a company's strategy.

The key takeaway for a competitive intelligence professional is that managers often define competition too narrowly, focusing only on direct rivals. However, competition for profits extends to customers, suppliers, potential entrants, and substitute products, collectively forming the five competitive forces that shape an industry’s structure and profitability.

This framework frequently serves as the foundation for many organization-wide initiatives, new projects, or products before significant investments are made.

Operational efficiency vs. strategic positioning

While operational efficiency is an important aspect of profitability, Porter argues that managers often become overly fixated on efficiency. True strategy involves creating a unique position through a distinct set of activities, which competitors find difficult to replicate due to trade-offs.

There are three sources of strategic positioning:

Variety-based positioning: Offering a subset of industry products or services using distinct activities.
Needs-based positioning: Serving most or all of the needs of a specific group of customers through tailored activities.
Access-based positioning: Serving customers accessible in different ways, such as geographic location or scale.

A sustainable strategic position requires making clear choices about what not to do.

Value Chain Model

Porter intertwines his Value Chain Model across chapters discussing in detail how managers can examine their organization’s dependencies, advantages, and gaps in creating products/services. This model breaks down a company's activities into primary and support activities. The aim is to identify where value is added and how to optimize these processes for greater efficiency and competitive advantage.

By breaking down operations into distinct activities and analyzing their impact, companies can optimize their strategies, reduce costs, and achieve sustainable competitive advantages.

Diamond Model

Porter continues his discussion on competition by expanding the principles of Competitive Strategy to Locations and Nations. One of the models he introduces is the Diamond Model. The "diamond" model illustrates how various national attributes collectively foster competitive industries.

Governments play a crucial role in creating an environment conducive to innovation, while companies must adopt strategies that leverage and enhance their national advantages. This is a good framework for CI professionals working on global expansion and new market entry strategies.

Porter also discusses the importance and impact of clusters in enhancing competitiveness at various geographic levels, such as national, state, and local economies.

Cluster theory emphasizes the importance of geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions (e.g., universities, trade associations) that compete and cooperate.

Environment and competition

Porter extends his competitive framework to societal issues, arguing that competition can generate significant social value. "Green and Competitive: Ending the Stalemate" posits that environmental regulations can drive innovation and improve resource productivity, aligning economic and environmental goals.

Porter argues that properly designed environmental standards can spur innovation, leading to increased resource productivity and offsetting compliance costs. He discusses the example of how the Dutch flower industry responded to stringent environmental regulations by developing a closed-loop system for cultivation, which improved product quality, reduced costs, and enhanced global competitiveness.

Through other examples and case studies, he opines that environmental progress and competitiveness are connected through innovation and resource efficiency. Industries that innovate in response to environmental challenges are more likely to stay competitive globally.

Competition and inner cities, philanthropy, CSR…

Porter extends his discussion on competition and how to evolve competitive strategy in the context of national development, managing philanthropy, and combining corporate social responsibility activities of companies to achieve competitive advantage.

Though these topics may not be directly relevant for a CI professional, I believe these chapters in the book open up a different perspective on how policies and organizational change initiatives can be undertaken for sustained development. Also, professionals working in these sectors can get a different perspective on their projects and approaches through the lens of competitive advantage.

Many foundations fall short of their potential by not thinking strategically or measuring results. Foundations are uniquely positioned to lead social progress due to their independence and scale, but they often act as passive intermediaries.

To maximize their impact, foundations need to adopt strategic approaches, focusing on selecting the best grantees, signaling other funders, improving grantee performance, and advancing knowledge and practice in their fields.

This requires clear positioning, operational alignment, and a commitment to evaluating and learning from their efforts. By doing so, foundations can create greater social value and fulfill their potential as leaders in social progress.

Co-author of the chapter, Milton Friedman argues that the only social responsibility of a business is to increase profits, suggesting that charitable contributions should be made by individual stockholders or employees, not corporations.

This argument holds when corporate contributions are unfocused and piecemeal, as they often are today. However, corporations can strategically use their philanthropy to improve their competitive context, aligning social and economic goals.

In the final chapters, the authors argue that companies should integrate social responsibility into their core business strategies rather than treating CSR as a cost or PR exercise. This involves identifying their unique impacts on society and leveraging their resources to address issues that intersect with their business goals, creating mutual benefits.

Examples include Toyota's hybrid cars and Cisco's Networking Academy. Companies can enhance their competitiveness by focusing on strategic CSR while making meaningful social contributions. Integrating CSR with business strategy requires organizational changes, engaging management, and shifting from a defensive to an affirmative approach, ultimately leading to greater social and economic value.

Leadership and strategy

The final section addresses the critical role of leadership in strategy. "Seven Surprises for New CEOs" offers valuable insights into the unique challenges faced by CEOs of large organizations, emphasizing the importance of strategic thinking in leadership roles.

Overall, a highly recommended book that delves deep into the intricacies of competitive strategy, offering valuable insights for both practitioners and scholars. This book brings together some of Porter's most influential articles, providing a robust framework for understanding competition and value creation across various contexts.

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