An excellent article on strategic imperatives from Harvard Business Review, by Andrea Ovans
If you read what Peter Drucker had to say about competition back in the late ’50s and early ‘60s, he really only talked about one thing: competition on price. He was hardly alone — that was evidently how most economists thought about competition, too.
It was this received opinion Michael Porter was questioning when, in 1979, he mapped out four additional competitive forces in “How Competitive Forces Shape Strategy.” “Price competition can’t be all there is to it,” he explained to me, when during the course of updating that seminal piece in 2008, I asked him about the origins of the five forces model.
And so, he famously argued, in addition to the fierceness of price competition among industry rivals, the degree of competitiveness in an industry (that is, the degree to which players are free to set their own prices) depends on the bargaining power of buyers and of suppliers, as well as how threatening substitute products and new entrants are. When these forces are weak, as in software and soft drinks, many companies are profitable. When they are strong, as in the airline and hotel industries, almost no company earns an attractive return on investment. Strategy, it follows for Porter, is a matter of working out your company’s best position relative not just to pricing pressures from rivals but to all the forces in your competitive environment.
And for many, it seemed, that was pretty much the last word on the subject. As recently as March 2015, for instance, Rebecca Homkes and Don and Charles Sull said in “Why Strategy Execution Unravels – and What to Do About it”: “Since Michael Porter’s seminal work in the 1980s we have had a clear and widely accepted definition of what strategy is.”
But that wasn’t exactly so.
Interestingly, Porter’s thinking on the definition of strategy wasn’t published until November of 1996, which means that 17 years after he burst on the scene with his original five forces article he still felt the need to address the question explicitly.
In “What Is Strategy,” Porter argues against a bevy of alternate views, both old and then new, that were circulating in the intervening years. In particular he takes issue with the views that strategy is a matter of:
At a fundamental level, all strategies for Porter boil down to two very broad options: Do what everyone else is doing (but spend less money doing it), or do something no one else can do. While either approach can be successful, the two are for him not economically (or, I think, morally) equivalent. Competing by doing what everyone else is doing means, he says, competing on price (that is, learning to be more efficient than your rivals). But that just shrinks the pie as, in the rush to the bottom, profitability declines for the entire industry.
Alternatively, you could expand the pie by staking out some sustainable position based on a unique advantage you create with a clever, preferably complicated and interdependent set of activities (which some thinkers also call a value chain or a business model). This choice is easy to see in the airline industry, where most airlines “compete to be the best,” as Porter puts it, fighting over a very stingy pie indeed, while Southwest, among a handful of other airlines, built far more profitable businesses with a completely different approach, which targeted a different customer (people who might otherwise drive, for example) with a cleverly efficient set of interdependent activities, thereby expanding the entire market.