Now beyond its eleventh printing and translated into twelve languages, Michael Porter’s The Competitive Advantage of Nations has changed completely our conception of how prosperity is created and sustained in the modern global economy. Porter’s groundbreaking study of international competitiveness has shaped national policy in countries around the world. It has also transformed thinking and action in states, cities, companies, and even entire regions such as Central America.
Based on research in ten leading trading nations, The Competitive Advantage of Nations offers the first theory of competitiveness based on the causes of the productivity with which companies compete. Porter shows how traditional comparative advantages such as natural resources and pools of labor have been superseded as sources of prosperity, and how broad macroeconomic accounts of competitiveness are insufficient. The book introduces Porter’s “diamond,” a whole new way to understand the competitive position of a nation (or other locations) in global competition that is now an integral part of international business thinking. Porter's concept of “clusters,” or groups of interconnected firms, suppliers, related industries, and institutions that arise in particular locations, has become a new way for companies and governments to think about economies, assess the competitive advantage of locations, and set public policy.
Even before publication of the book, Porter’s theory had guided national reassessments in New Zealand and elsewhere. His ideas and personal involvement have shaped strategy in countries as diverse as the Netherlands, Portugal, Taiwan, Costa Rica, and India, and regions such as Massachusetts, California, and the Basque country. Hundreds of cluster initiatives have flourished throughout the world. In an era of intensifying global competition, this pathbreaking book on the new wealth of nations has become the standard by which all future work must be measured.
Michael E. Porter is the leading authority on competitive strategy, the competitiveness and economic development of nations, states, and regions, and the application of competitive principles to social problems such as health care, the environment, and corporate responsibility.
Professor Porter is generally recognized as the "Father of Strategy", as has been identified in a variety of rankings and surveys as the world’s most influential thinker on management and competitiveness. He has ranked #1 on "Thinkers 50".
He is the Bishop William Lawrence University Professor, based at Harvard Business School. A University full-professorship is the highest professional recognition that can be awarded to a Harvard faculty member.
In 2001, Harvard Business School and Harvard University jointly created the Institute for Strategy and Competitiveness, dedicated to furthering Porter’s work.
Professor Porter is the author of 17 books and over 125 articles. He is the founder of elite strategy consulting firm, the Monitor Group.
He received a B.S.E. with high honors in aerospace and mechanical engineering from Princeton University in 1969, where he was elected to Phi Beta Kappa and Tau Beta Pi. He received an M.B.A. with high distinction in 1971 from the Harvard Business School, where he was a George F. Baker Scholar, and a Ph.D. in Business Economics from Harvard University in 1973.
Below are key excerpts from the book that I found particularly insightful:
1- "Both industry attractiveness and competitive position can be shaped by a firm, and this is what makes the choice of competitive strategy both challenging and exciting. While industry attractiveness is partly a reflection of factors over which a firm has little influence, competitive strategy has considerable power to make an industry more competitive strategy has considerable power to make an industry m( or less attractive. At the same time, a firm can clearly improve or erode its position within an industry through its choice of strategy. Competitive strategy, then, not only responds to the environment but also attempts to shape that environment in a firm's favor. These two central questions in competitive strategy have been at the core of my research."
2- "The ability of firms to shape industry structure places a particular burden on industry leaders. Leaders' actions can have a disproportionate impact on structure, because of their size and influence over buyers, suppliers, and other competitors. At the same time, leaders' large market shares guarantee that anything that changes overall industry structure will affect them as well. A leader, then, must constantly balance its own competitive position against the health of the industry as a whole. Often leaders are better off" taking actions to improve or protect industry structure rather than seeking greater competitive advantage for themselves."
3- "The second central question in competitive strategy is a firm's relative position within its industry. Positioning determines whether a firm's profitabihty is above or below the industry average. A firm that can position itself well may earn high rates of return even though industry structure is unfavorable and the average profitability of the industry is therefore modest. The fundamental basis of above-average performance in the long run is sustainable competitive advantage. ^ Though a firm can have a myriad of strengths and weaknesses vis-a-vis its competitors, there are two basic types of competitive advantage a firm can possess: low cost or diff'erentiation. The significance of any strength or weakness a firm possesses is ultimately a function of its impact on relative cost or diff'erentiation. Cost advantage and differentiation in turn stem from industry structure. They result from a firm's ability to cope with the five forces better than its rivals. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them lead to three generic strategies for achieving above-average performance in an industry: cost leadership, diff'erentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus."
4- "The ability to be both low cost and differentiated is a function of being the only firm with the new innovation, however. Once competitors also introduce the innovation, the firm is again in the position of having to make a tradeoff."
5- "Linkages among value activities arise from a number of generic causes, among them the following: The same function can be performed in different ways...The cost or performance of direct activities is improved by greater efforts in indirect activities...Activities performed inside a firm reduce the need to demonstrate, explain, or service a product in the field...Quality assurance functions can be performed in different ways."
6- "Exploiting linkages usually requires information or information flows that allow optimization or coordination to take place. Thus, information systems are often vital to gaining competitive advantages from linkages."
7- "Cost dynamics occur because of the interplay of cost drivers over time, as a firm grows or as industry conditions change. The most common sources of cost dynamics include: Industry Real Growth...Differential Scale Sensitivity...Different Learning Rates...Differential Technological Change...Relative Inflation of Costs...Aging...Market Adjustment."
8- "Steps in Strategic Cost Analysis...1. Identify the appropriate value chain and assign costs and assets to it. 2. Diagnose the cost drivers of each value activity and how they interact. 3 Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences. 4. Develop a strategy to lower relative cost position through controlling cost drivers or re-configuring the value chain and/ or downstream value. 5. Ensure that cost reduction efforts do not erode differentiation, or make a conscious choice to do so. 6. Test the cost reduction strategy for sustainability."
9- "Steps in Differentiation...I. Determine who the real buyer is...2. Identify the buyer's value chain and the firm's impact on it...3. Determine ranked buyer purchasing criteria...4. Assess the existing and potential sources of uniqueness in a firm's value chain...5.Identify the cost of existing and potential sources of differentiation...6.Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating...7.Test the chosen differentiation strategy for sustainability...8.Reduce cost in activities that do not affect the chosen forms of differentiation."
10- "Technological change is not important for its own sake, but is important if it affects competitive advantage and industry structure. Not all technological change is strategically beneficial; it may worsen a firm's competitive position and industry attractiveness. High technology does not guarantee profitability. Indeed, many high-technology industries are much less profitable than some "low-technology" industries due to their unfavorable structures."
11- "Formulating Technological Strategy...1. Identify all the distinct technologies and subtechnologies in the value chain... 2.Identify potentially relevant technologies in other industries or under scientific development...3.Determine the likely path of change of key technologies...4.Determine which technologies and potential technological changes are most significant for competitive advantage and industry structure...5.Assess a firm's relative capabilities in important technologies and the cost of making improvements.6.Select a technology strategy, encompassing all important technologies, that reinforces the firm's overall competitive strategy."
12- "Competitors are not all equally attractive or unattractive. A good competitor is one that can perform the beneficial functions described above without representing too severe a long-term threat. A good competitor is one that challenges the firm not to be complacent but is a competitor with which the firm can achieve a stable and profitable industry equilibrium without protracted warfare. Bad competitors, by and large, have the opposite characteristics. No competitor ever meets all of the tests of a good competitor. Competitors usually have some characteristics of a good competitor and some characteristics of a bad competitor. Some managers, as result, will assert that there is no such thing as a good competitor. This view ignores the essential point that some competitors are a lot better than others, and can have very different effects on a firm's competitive position. In practice, a firm must understand where each of its competitors falls on the spectrum from good to bad and behave accordingly."
13- "To segment an industry, then, four observable classes of segmentation variables are used either individually or in combination to capture differences among producers and buyers. In any given industry, a, any or all of these variables can define strategically relevant segments: Product variety. The discrete product varieties that are, or could be, produced. Buyer type. The types of end buyers that purchase, or could purchase, the industry's products. Channel (immediate buyer). The alternative distribution channels employed or potentially employed to reach end buyers. Geographic buyer location. The geographic location of buyers defined by locality, region, country, or group of countries."
14- "Industry Segmentation: 1) Identify the discrete product varieties, buyer types, channels, and geographic areas in the industry that have implications for structure or competitive advantage 2) Reduce the number of segmentation variables by applying the significance test 3) Identify the most meaningful discrete categories for each variable 4) Reduce the number of segmentation variables further collapsing correlated variables together 5) Plot two-dimensional segmentation matrices for pairs of variables and eliminate correlated variables and null segments 6) Combine these segmentation matrices into one or two industry segmentation matrices."
15- "Sharing activities among business units is, then, a potential substitute for market share in any one business unit. A firm that can i share scale- or learning-sensitive activities among a number of business units may neutralize the cost advantage of a high market share firm competing with one business unit. Sharing is not exactly equivalent to increasing market share in one business unit, however, because a shared activity often involves greater complexity than an equivalent scale activity serving one business unit. The complexity of a shared logistical system involving ten product varieties may increase geometrically cc compared to one that must handle only five. The added complexity becomes a cost of sharing."
16- "Formulating Horizontal Strategy: 1. Identify all tangible interrelationships...2. Trace tangible interrelationships outside the boundaries of the firm... 3. Identify possible intangible interrelationships...4. Identify competitor interrelationships...5. Assess the importance of interrelationships to competitive advantage...6. Develop a coordinated horizontal strategy to achieve and enhance the most important interrelationships...7.Create horizontal organizational mechanisms to assure implementation."
17- "While there are many non-Japanese firms that have achieved interrelationships, a number of characteristics of many, though not all, Japanese firms make them well positioned for exploiting interrelationships: -strong belief in overarching corporate themes -internal development of new businesses -a less rigid tradition of autonomy -more flexible incentives, less based on business unit results -willingness to centralize activities -greater tradition of committees and frequent personal contact among executives -intensive and continuing in-house training -corporatewide hiring and training"
18- "Complements are pervasive in industries. A firm must know what complementary products it depends on, and how they affect its competitive advantage and the structure of the industry as a whole. A firm must decide which complements it should produce itself, and how to package and price them. Bundling and unbundling of complements to package and price them. bundling and unbundling of complements is one of the ways in which fundamental industry restructuring takes place. The challenge is to make strategy towards complements an opportunity rather than a source of competitive advantage for competitors."
19- "An industry scenario is an internally consistent view of an industry's future structure. It is based on a set of plausible assumptions about the important uncertainties that might influence industry structure, carried through to the implications for creating and sustaining competitive advantage. An industry scenario is not a forecast but one possible future structure. A set of industry scenarios is carefully chosen to reflect the range of possible (and credible) future industry structures with important implications for competition. The entire set of scenarios, rather than the most likely one, is then used to design a competitive Strategy. The time period used in industry scenarios should reflect the time horizon of the most important investment decisions."
20- "The best way to deal with uncertainty is to make a conscious choice to follow one or more approaches, rather than a choice based on inertia or an implicit scenario. Weighing the factors involved in choosing 5 an approach described above requires a logic for each scenario that portrays the interdependencies between various aspects of industry structure. The most challenging part of dealing with uncertainty is to find creative ways to minimize the cost of preserving flexibility or hedging, and to maximize the advantages of betting correctly. Understanding the way in which each activity in the value chain can contribute to competitive advantage under the various scenarios may allow the firm to do so."
21- "Conditions for Attacking a Leader: Successfully attacking a leader requires that a challenger meet threes basic conditions: 1. A sustainable competitive advantage...2. Proximity in other activities...3. Some impediment to leader retaliation."
22- "Some important industry signals of leader vulnerability include: -discontinuous technological change -buyer changes -changing channels -shifting input costs or quality -gentlemen's game...The following traits of industry leaders are signs of possible vulnerability: -struck in the middle -unhappy buyer -pioneer of current industry technology -very high profitability -history of regulatory problems -weak performer in the parent company portfolio."
Understanding competition in the business world is what this Harvard Professor is all about, he believes capitalism is our best benefactor and our savior in the future. This is the book for understanding what business is all about. Though a bit dated, if combined with his new writings it gives you an overall picture of business, while portraying what an individual can do also...A must read for any businessman, from student to senior leader. All the best, Donald
Michael Porter has unquestionably been to corporate strategy what Mendelejev was to chemistry with the periodic table or von Linné to botany with the taxonomy system. But perhaps different from these two, for our purposes here it is a tricky task indeed to separate one piece of Porter ́s work to review. The sum of value of Competitive Strategy, Competitive Advantage, The Competitive Advantage of Nations, On Competition and numerous groundbreaking papers, is simply greater than the individual parts. But given the staying power of the book and Mr Porter ́s own opinion today, 25 years later, we believe Competitive Advantage is a) his best work, b) is without any precedence in management literature and c) serves up the most relevance for analyzing a business from an investor ́s perspective.
Competitive Advantage was written in 1985, five years after his “Five Forces”-book Competitive Strategy. Before then, the analysis of why a firm gained competitive advantage was restricted to one word - size. This was obviously a somewhat naïve and self-contradictory reasoning that dealt more with the outcome of competitive advantage rather than its true cause. With this book and its later follow- up articles, seminars, papers etc, Porter practically coined the phrase “competitive advantage” and its crucial add-on; sustainable. He had spent the years subsequent to the publishing of Competitive Strategy wrestling with the challenge of how to find a systematic way of examining the roots of competitive advantage that revealed essential differences between organizations without being unbearably complex or too cumbersome to use. In that way, Porter in 1985 saw Competitive Advantage as a major leap forward and that would stand the test of time. And he still does: “The ideas in Competitive Advantage are still percolating”.
In the book Porter put forward two difference makers in a firm ́s quest towards finding and sustaining an edge vs. competition: being the low-cost provider or having a clear product differentiation. Part IV of the book, where he deals with product differentiation as a concept, is arguably where Competitive Advantage comes to its fore. It is eloquently explained, relatively easy to grasp and put in historical context. As many readers and practitioners before me have opined, product differentiation is not hard to understand conceptually, especially not in hindsight (yes, Coca- Cola has it). But is much harder to see in real-time, and even more of a stretch to actually implement into an organization.
Porter ́s method, of course, is via what he calls the firm ́s “activities”. This is the book ́s third major pillar, apart from low cost and product differentiation. Think of activities as the tool that makes strategy operational. Porter has later stated that this was a major breakthrough for him, insomuch as it provided a needed boost to the at- the-time popular SWOT-based analysis. For all its convenience and “checklist-appeal”, SWOT did recognize that a firm is indeed multidimensional, but it failed to provide a link to profitability or explore the sources of competitive advantage in a systematic way. This is something that Porter ́s activities did, and was such a powerful tool to corporations that it morphed into accounting as well. “Activity-based cost accounting” is a familiar term to the profession today.
Porter ́s later research has also largely dealt with the concept of activities. What makes them so hard to imitate? How do they develop over time? Personally, this work is of great interest to me. Mainly because it is the most elusive, and thus hardest to copy. To a great extent it also overlaps with the concept of corporate culture. A great culture is nothing but a carefully crafted set of activities, developed over time within a firm. Of course, a brilliant book in its own right in this realm is Bruce Greenwald ́s Competition Demystified from 2005.
If they were ever relevant, this book's theories are almost completely outdated and misleading now.
Still the core concepts are useful to understand, because they've been drilled into the heads of most MBA's – and many haven't learned to question Porter's dangerously misleading precepts. Learning them will reveal a set of blind spots that afflict many of your partners, clients and competitors. (In fact, "blind spots" may be too mild. For some they're an Achilles Heel.)
Awareness of these common defects helps you protect your clients and partners and win over competitors or convert them into allies. Now *there* is where Porter can help your strategic thinking. Just read it with a critical eye, with those goals in mind. Don't take it at face value or drink the counterproductive Kool Aid.
Also, a lot of the language and buzzwords here influenced 1980s and 1990s American business-speak, and that can help in communicating and working with old school businessfolk. They play an important role and it helps to speak their language.
An Academic book about competitive advantage, which is dry and doesn't have much real-life experiments but if you have many real cases in mindful, you will see this book better. Michael Porter helps any businessman understand that: competitive advantage has in some small phrases of supply chain of customers, suppliers or any steps of company. Many value chains have tight linked together, and anything make promote this relationship will become competitive advantage. I can see from Porter something like: How to brainstorm about industry. In value chain of any industry, we will have some basic points to focus on like: Technology, tangible - intangible assets, service, brand..... But in the last part of book, I didn't enjoy with many strategies which were recommended by Michael because something I don't understand when looking at real life and something I think it too complicate to use for any great leaders.
I'd be loathe to recommend this book to anyone outside of a business degree or the financial industry. It certainly reads like a theory dug up from the schools of higher education. Of course, we can't forget how some of the best stories and legends deal with competition and leaders.
Why would people be a competitive advantage?
It would likely feed into the notion that everyone is a risk manager and called to be leaders. This, in turn, leaves us vulnerable to attack if some agents become outed as provocateurs. Sometimes it appears like the leadership eats its own, we would force retirement if situations weren't addressed in a sufficient manner.
Michael Porter is obviously a brilliant mind in the line of business strategy, but I did find this book very hard to read. It seemed to jump from points to point and unfortunately the examples cited are somewhat lost on a younger generation lacking the historical context of the firms mentioned. Content is a 5 but readability was a 3 for me.
Even if at some elements slightly outdated and too focused on deep analysis, this is still such a valuable guidebook on thinking about competition and forming competitive advantage. And i’ve finally managed to finish reading it! Took me years
Good info, gets into very specifics - really at a CEO level of running a business, a fairly large business. It seems less appropriate for the entrepreneur/small business owner, though there are lessons to learn for everyone.
A timeless classic on corporate strategy. There'll always something new to be interpreted and learnt, that can be applied in the workplace. Definitely a book that I'll be re-reading again, and one that's highly recommended for those in the strategy space.
I will read the other two in the trilogy. Even though published in 1985 a great insights into the management culture of the time and now. Helpful in understanding the changes and pressures present today.
Good rigorous overview of how to go about appraising a market and in particular the competition that will be faced and the considerations that need to be made in face of the identified and also less obvious competition (e.g. from adjacent markets/technologies). The process is sound although where the book is of course now struggling is in it's age; it was written and published in the mid '70's and of course much has chnaged since then in how fast a market moves and in the tools available to make a market assessment. Great base material ripe for being refreshed to encompass the internet age.
A quite detailed exploration on competition, and stuffs behind it, either in conceptual or practical way. It also offers a very helpful model to understand how those stuffs work in forming something called: competition, and of course how to win it using the title of this book: competitive advantage.
A very comprehensive discussion on strategy development. The core concepts for building competitive advantage are still relevant even though the book was published back in 1985. It serves as a great reference for anyone who is involved in strategy work.