BE UNIQUE, don't compete on price alone. This is the simple message competition guru Michael Porter has for business owners and managers. In Understanding Michael Porter: The Essential Guide to Competition and Strategy, Joan Magretta lays out Porter's ideas on competition in a concise, easy-to-read volume.
Central to Porter's thinking on competition is the idea that competing on price alone is dangerous because it erodes profits and leads to a winner-takes-all mentality. Firms will do better to identify a niche in the market and serve it.
Rather than compete for market share, firms should focus on profits by seeking to add new value for customers in the product or service they offer. Yet managers often believe they can grow their firms by adding new product lines or services - Porter says this is a mistake. Firms can lose track of where their real competitive advantage lies if they opt for more add-ons.
Being competitive also depends on several choices a business makes and on the connections among them. For example, Ikea's decision to sell units in flat packs (which lowered prices and increased store space) wasn't the only reason it became the world's leading furniture retailer. The decision was complemented by in-store childcare services and a cafeteria, while store locations in suburban areas kept land prices down and allowed for bigger shop floors and parking areas.
Magretta also details how Porter's various forces and actors are at play in competition. These forces - including the bargaining power of suppliers and the threat of new entrants - help determine the level of competition in any business sector. She argues that to position their firms better in the market, managers or business owners should analyse these forces rather than do a Swot analysis - Strengths, Weaknesses, Opportunities and Threats.
Her contention is that because there are no coherent economic principles underlying a Swot analysis, one can end up with random lists shaped by biases such as an executive's personal agenda.
Porter also criticises share prices' ability to measure a firm's competitiveness, pointing out that following share prices alone leads to the pursuit of quick returns rather than on creating long-term economic value.
"Capital markets have become toxic for strategy. The single-minded pursuit of shareholder value . has been enormously destructive for strategy and value creation," Porter says. These words, coming after the 2008 global economic crisis, sound a warning to business. Too often, the pursuit of quick profits has led to firms more concerned about being number one than on serving their customers. O rganisations mustn't be afraid to be different, even if it means charging more, as long as they create real value.
TITLE: Understanding Michael Porter: The Essential Guide to Competition and Strategy
AUTHOR: Joan Magretta
PUBLISHER: Harvard Business Review Press