PDF Summary:Competitive Strategy, by Michael Porter

In Competitive Strategy, renowned economist, best-selling author, and Harvard Business School professor Michael Porter presents a comprehensive framework for businesses seeking to achieve a competitive advantage. Originally published in 1980, this groundbreaking book revolutionized the field of strategic management and remains an invaluable resource for business leaders operating in complex and competitive environments.

This guide explores Porter’s insights and practical advice for gaining a competitive advantage, covering:

• Five factors that influence a market’s competitiveness and profit potential
• Four research areas for understanding and anticipating competitors’ strategies
• Three strategies for managing the five factors and outperforming competitors

Additionally, we’ll complement Porter’s ideas with research from management professionals and we’ll suggest actionable strategies to help you apply his concepts to your own business.

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Porter argues that industries experiencing stagnant growth rates involve intense competition among businesses seeking to gain a larger share of the existing customer base due to a lack of new market opportunities. (In the declining print media industry, limited growth rates and shrinking customer groups escalate competition among publishers.)

(Shortform note: While slow market growth escalates competition, it also presents an opportunity for market consolidation—when large, well-equipped companies acquire struggling smaller ones, enabling the consolidation of expertise and resources. As a result, these larger companies find new avenues for growth and sustainability, better positioning themselves to overcome the challenges posed by slow market growth.)

Condition 4) Undifferentiated Offers

Porter says that markets where products or services lack clear distinguishing features prompt brands to engage in aggressive marketing strategies and price competition to attract customers. (In the bottled water market, the products are so similar that brands must engage in aggressive marketing campaigns and price wars to stand out.)

(Shortform note: According to business experts, this market condition extends beyond customers struggling to distinguish between offers—it also manifests as a challenge in differentiating between businesses themselves. This means that customers perceive no differences among the companies vying for their attention, leading to indifference in their purchasing decisions. To address this, experts recommend businesses take a holistic approach by differentiating their brand identity, values, and customer experience—ensuring distinctiveness both in their products and overall business presence to stand out in a crowded market.)

Condition 5) Difficulty Exiting the Market

According to Porter, the challenges companies face when attempting to exit market segments due to factors like high investment requirements or contractual obligations, lead to intensified competition as companies try to maintain viability. (In the telecommunications industry, high infrastructure investments make it economically challenging to exit the market, leading to fierce competition to recoup costs.)

(Shortform note: High exit costs don’t always result in fierce competition among businesses. Instead, some businesses choose to reposition themselves to capitalize on emerging trends. For example, when IBM faced challenges exiting the PC market, it sold its PC division to Lenovo. While Lenovo managed the PC business, IBM focused on providing software and consulting services. This strategic move enabled IBM to shift its focus and expertise while leveraging Lenovo's capabilities in the PC market to avoid intense competition.)

Alternative Frameworks: SWOT and PESTEL

While Porter's framework is widely used to analyze competition within a market, several alternative frameworks can provide complementary perspectives depending on the specific context and requirements of the analysis.

One such alternative is the SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis, which offers a broader view by examining both internal factors (an organization’s strengths and weaknesses) and external factors (opportunities and threats in the market). This framework emphasizes the organization's internal capabilities and external market dynamics.

Another alternative is a PESTEL (Political, Economic, Sociocultural, Technological, Environmental, and Legal) analysis, which focuses on macro-environmental factors that can influence an industry or organization. It provides a holistic understanding of the external forces at play, such as political and legal regulations, economic conditions, socio-cultural trends, technological advancements, and environmental factors. This broader scope enables a more comprehensive analysis of the industry's external environment.

Combining these alternative frameworks with Porter's framework can provide a more nuanced understanding of the competitive landscape and help guide strategic decision-making in a more holistic manner.

Part 2: Analyze Your Competitors’ Strategies

In addition to understanding the factors that shape your market, analyze your competitors’ strategies. According to Porter, researching your competitors will benefit you in two ways. First, it will enable you to create effective countermoves to their strategies. Second, it will help you anticipate their responses to your strategic initiatives. He suggests four areas of research:

1. Competitors’ objectives
2. Competitors’ self-perceptions and decisions
3. Competitors’ current approaches
4. Competitors’ strengths and weaknesses

Let’s explore the insights you’ll gain by researching each of these areas.

Research Area #1: Competitors’ Objectives

Porter suggests that researching your competitors’ objectives helps you ascertain whether they are satisfied with their current performance and market position, which enables you to accurately predict their reactions to shifting market conditions.

• Example: Your competitor’s goal is to acquire a 30% market share. Since they only hold 10%, you can assume that they’re dissatisfied with their performance and will react aggressively to any threats that hinder their growth plans.

Additionally, this line of research helps you identify whether you and your competitors share common objectives or if your objectives differ.

Common objectives: Areas where your goals align with those of your competitors indicate the potential for intense competition in the future. For instance, if multiple competitors plan to expand into a specific market segment simultaneously, they might inadvertently increase competition by targeting the same customer base or devising similar marketing campaigns.

Differing objectives: Areas where your goals diverge from those of your competitors indicate opportunities to capitalize on differentiation. For example, if your competitors aim to offer the cheapest products while you strive to provide the most innovative ones, you can position yourself as a premium brand catering to customers seeking superior products.

Advice on Researching Competitors’ Objectives

Like Porter, many business experts suggest that knowing your competitors’ goals is essential for positioning your business for success. Further, as previously discussed, examining how competitors’ goals may align with your own paves the way for potential alliances that can create mutual benefits. Here are multiple methods you can use to learn more about your competitors’ objectives.

• Examine your competitors' annual reports, press releases, investor presentations, and public statements for clues about their strategic objectives, future plans, and performance targets.

• Keep an eye on your competitors' job postings and hiring trends for clues about their priorities—such as if they’re investing in specific skill sets or entering new markets.

• Attend industry trade shows and pay attention to your competitors’ presentations, panel discussions, and announcements to figure out what direction they’re moving toward.

• Keep track of key personnel changes within your competitors' organizations to gain insights into new strategic directions—such as changes in leadership or strategic roles.

• Stay informed about any partnerships or collaborations your competitors enter into, as it can reveal their objectives and potential areas of expansion or specialization.

• Engage with mutual customers and suppliers to gather insights about your competitors' priorities.

You’ll find advice for figuring out how well your competitors are meeting their objectives in our commentary for Research Area #3.

Research Area #2: Competitors’ Self-Perceptions and Decisions

Porter explains that researching how your competitors perceive themselves reveals insights into their assumptions and decision-making patterns.

• Example: A competitor that perceives itself as affordable might assume that price is the primary factor influencing purchasing decisions. This assumption influences all its strategic decisions, such as choosing to prioritize cost reduction over innovation.

According to Porter, the insights you gain on your competitors’ decision-making process can reveal specific market needs that they’re overlooking—which, in turn, enables you to position your business effectively in relation to theirs.

Example: Because your competitor prioritizes cost-cutting over innovation, it overlooks customers who value superior quality products. This suggests an opportunity to capitalize on a market gap and avoid direct competition: Position your business as a premium brand that caters to customers seeking high-end products.

Biases Lead to Missed Opportunities

How can understanding competitors’ self-perceptions and decision-making patterns reveal market needs they might overlook? According to psychologists, it provides clues into the biases that might limit their thinking, causing them to miss out on opportunities that they can capitalize on. Some common biases that might hinder a competitor’s ability to identify and address market needs include:

Confirmation bias: This bias leads competitors to selectively seek and interpret information that confirms their existing beliefs and perceptions. As a result, they may prioritize certain factors, such as price, while disregarding other important market needs or opportunities.

Anchoring bias: Competitors with this bias anchor their decision-making on a specific idea, such as positioning themselves as an affordable option. This limits their ability to consider alternative strategies or approaches, such as prioritizing innovation or emphasizing product quality.

Availability bias: Competitors with this bias rely heavily on readily available information or past experiences to form their perceptions. Consequently, they may overlook emerging trends or changes in customer preferences, potentially leaving gaps in addressing specific market needs.

Advice on Researching Competitors’ Self-Perceptions

Marketing experts recommend the following methods for assessing how your competitors perceive themselves or wish to be perceived:

• Engage in social listening: Monitor their social media channels, looking for patterns in their messaging, tone of voice, and the language they use to describe their brand, products, and services.

• Conduct interviews: Reach out to their current or former employees, as well as industry insiders, for insights into their internal culture and values.

• Attend industry events: Listen to their presentations, paying attention to the language they use and the image they project to gain insights into how they position themselves.

• Analyze brand aesthetics: Look at their logos, color schemes, taglines, and overall brand messaging to identify how they want customers to perceive them.

Research Area #3: Competitors’ Current Approaches

According to Porter, researching your competitors’ current approaches reveals how they organize their resources and operational procedures to meet their objectives. This information enables you to monitor and evaluate the effectiveness of their strategies and anticipate potential strategic shifts.

Example: Your competitor prioritizes exceptional customer service, allocating significant resources to ensure customer satisfaction and retention. By monitoring its high customer satisfaction and retention rates, you evaluate the effectiveness of its strategy and predict that it’ll continue to focus on customer-centric approaches to maintain a competitive edge.

Nine Questions to Uncover Competitors’ Current Approaches

Alexander Osterwalder and Yves Pigneur (Business Model Generation) offer an in-depth way to analyze competitors’ current strategies: Ask nine questions to gain insights into their business model:

1) Who are its customers? Define what group of consumers the business targets its product to. For example, if it sells children’s books, it’s probably targeting parents and preschools.

• Methods for evaluating the effectiveness of its customer targeting strategy include tracking customer feedback and measuring sales in these target segments to assess whether their marketing efforts and content resonate with parents and preschools.

2) What channels does it use to communicate, sell, and distribute its products and services? For example, a business might rely on online advertising, an e-commerce store, and the postal system.

• Methods for evaluating the effectiveness of its communication, sales, and distribution strategy include tracking and measuring click-through rates, conversion rates, and sales attributed to specific advertising channels.

3) What sort of customer relationships does it establish? For example, it might offer a fully personalized one-on-one service to build customer loyalty. Or, it might offer automated services with no dedicated customer service representatives.

• Methods for evaluating the effectiveness of its customer relationship strategy include measuring customer churn rates, conducting customer satisfaction surveys, and monitoring customer support interactions for quality and responsiveness.

4) What value does it offer? How does its product or service benefit customers? For example, Smallpdf.com offers free and low-priced pdf services to individuals who don’t want to subscribe to traditional alternatives.

• Methods for evaluating the effectiveness of its value proposition include tracking subscriber growth, analyzing customer feedback, and monitoring customer engagement metrics.

5) What resources does it rely on? A business needs one or more of the following resources to create and deliver its products to customers: material (for example, specific equipment), monetary, intellectual (for example, copyrights or patents), and human (for example, employees or specialists).

• Methods for evaluating the effectiveness of its resource strategy include monitoring production costs and analyzing inventory turnover rates.

6) What partnerships does it rely on? There are four types of partnerships a business might rely on: between non-competitors (eBay and Paypal), between competitors (Apple and Microsoft’s patent-licensing agreement), joint alliances (Ford and Toyota develop hybrid trucks), and buyer-supplier alliances (Samsung supplies Apple).

• Methods for evaluating the effectiveness of its partnership strategy include measuring the impact these partnerships have on market share, revenue growth, and customer satisfaction.

7) What are its core activities? The main tasks that a business needs to focus on to operate successfully fall into at least one of the following three categories: production, troubleshooting, and infrastructure management.

• Methods for evaluating the effectiveness of its core activities include tracking key performance indicators for the category. For example, for competitors focused on troubleshooting, monitor customer complaints, response times, and resolution rates.

8) How does it make a profit? Does it deal in single transactions or recurring transactions? Does it offer fixed prices or variable prices?

• Methods for evaluating the effectiveness of its profit model include measuring revenue churn rates and evaluating the pricing strategy's impact on customer acquisition and retention.

9) What are its costs? Does the business have one-off costs to produce and distribute a product or does it have ongoing costs such as salaries and office rentals?

• Methods for evaluating the effectiveness of its costs strategy include analyzing financial statements, tracking the cost of goods sold, and monitoring production costs per unit.

Research Area #4: Competitors’ Strengths and Weaknesses

Porter suggests that researching your competitors' strengths and weaknesses helps you identify two key areas: areas where they have a competitive advantage, potentially posing formidable challenges to your business; and areas where they are vulnerable and that you can take advantage of to gain a competitive edge.

Example: Your competitor has a strong distribution network and loyal customer base, so it will be difficult for you to attract its existing customers. However, it does have a limited online presence, so you can leverage digital marketing strategies to reach the online customers that it’s unable to acquire.

Advice on Researching Competitors’ Strengths and Weaknesses

Like Porter, many business experts suggest that knowing your competitors’ strengths and weaknesses is key to forming a successful business strategy. Here are multiple methods you can use to effectively evaluate your competitors’ strengths and weaknesses.

• Identify potential vulnerabilities that may not be immediately apparent, such as dependence on a single supplier, compliance issues, or organizational weaknesses.

• Conduct surveys and interviews to understand the factors that their customers value and where they may fall short.

• Evaluate customer reviews, online ratings, and social media sentiment to uncover any potential compromises to their brand reputation.

• Analyze their supply chain management, production processes, logistics, and customer service operations to determine areas of excellence or inefficiency.

• Assess their research and development efforts, new product launches, and investments in emerging technologies to gauge their ability to innovate and adapt to market needs.

• Examine their financial statements, debt levels, and cash flow to assess their ability to invest in growth strategies, withstand economic downturns, or respond to unforeseen challenges.

Part 3: Determine Your Competitive Strategy

Once you’ve understood the factors that impact your market and have completed your competitor analysis, determine how you’ll manage the five factors and outperform your competitors.

Porter suggests that you align your operational procedures with one of three strategies to gain a competitive advantage in your market:

1. Set lower prices.
2. Offer something unique.
3. Target niche markets.

Let’s explore how to implement each of these strategies.

Strategy #1: Set Lower Prices

The first strategy for gaining a competitive advantage is to set the lowest market prices for your products and services. Porter explains that this strategy attracts price-sensitive customers, safeguards against more expensive substitute offers, and makes it difficult for both existing and new competitors to expand their market share.

To implement this strategy, Porter suggests that you identify areas to reduce operational costs without compromising quality or customer satisfaction. Achieve this by:

• Streamlining operational procedures: Simplify and optimize internal processes to eliminate inefficiencies, reduce waste, and improve productivity.
• Negotiating favorable supplier contracts: Secure more advantageous terms, such as lower prices, extended payment terms, or volume discounts.
• Capitalizing on economies of scale: Maximize cost advantages through increased production or expansion, benefiting from bulk purchasing, efficient resource utilization, and spreading fixed costs over larger output volumes.

Advice on Reducing Operational Costs

Josh Kaufman (The Personal MBA) adds to Porter’s advice by explaining that the best way to reduce costs is to make sure that your business operations are as efficient as possible. The more efficient your operations, the more time and money you save running your business—and the more financially viable it is to charge low prices without compromising on quality or customer satisfaction.

According to Kaufman, to optimize your operations, you first need to understand all of the tasks that your business relies on. Consider your product or service and write down all of the steps it takes to:

• Create it: This includes designing, manufacturing, and ensuring quality control.

• Market it: This includes your branding and media campaigns.

• Process orders: This varies depending on whether you deal directly with your customers or use intermediaries to handle your orders.

• Deliver it: This depends on the nature of your product or service and whether you’re reliant on distribution channels to fulfill your orders.

• Follow up on it: This includes providing customer support and troubleshooting problems.

Once you’ve outlined all of the tasks involved in running your business, consider how you can make incremental improvements to save time, effort, and money. Kaufman suggests considering ways to:

• Streamline tasks: This might include automating some of the tasks or eliminating unnecessary tasks.

• Cut costs while maintaining quality: This might include cutting intermediaries out or changing suppliers.

• Improve processes: This might include investing in resources such as equipment or more employees.

Finally, Kaufman suggests prioritizing the improvements that will make the biggest difference to your efficiency and profits.

Strategy #2: Offer Something Unique

The second strategy for gaining a competitive advantage is to offer something unique to the market. According to Porter, the main advantage of this strategy is that it acts as a defense against buyers looking for the cheapest deal. This is because, without comparable alternatives, buyers have no choice but to purchase from you—even if your prices are high. Additionally, offering something distinctive captures customer attention and cultivates loyalty among those who value uniqueness and are willing to pay premium prices for it.

(Shortform note: How can you come up with ideas for a unique product or service that has no substitutions? In Blue Ocean Strategy, Kim and Mauborgne argue that you can achieve this by examining how you can pursue both differentiation (raising standards and creating new features) and low costs (eliminating unnecessary features and cutting costs). For example, Cirque du Soleil achieved this by adding elements of theater and cutting animal acts from their performances. These simple changes helped them to redefine circus entertainment, appeal to new customer groups, bypass competition, and generate billions of dollars in revenue.)

To implement this strategy, Porter recommends that you invest in innovation and conduct market research to identify opportunities for setting your business apart from the competition. This can involve differentiating your branding, your packaging, your product or service features, or the way you interact with customers.

How to Effectively Differentiate Yourself

Luther (The Marketing Plan) expands on Porter’s advice by identifying two ways to establish your unique position in the market:

1) Define your brand’s personality: Consider how you want your customers to perceive your business. What will influence them to choose you over competitors and remain loyal to you? For example, if you intend to target eco-friendly consumers, you can appeal to them by ensuring that all of your operational procedures are as environmentally friendly as possible.

Then, look for ways to bolster customer perception by engaging in activities that will garner positive publicity. For example, eco-friendly consumers are more likely to buy from and remain loyal to companies that publicly show their support for environmental programs and sustainability projects.

2) Reinforce your marketing message: Focus your marketing message on the unique benefits that you’re offering in a way that appeals to your target market. Aligning your message in this way ensures two things: that your target audience will pay attention to your marketing message, and that they’ll immediately understand why your offer is superior to others in the market.

Once you’ve defined your marketing message, target the media that your potential customers engage with the most often, and ensure that all of your marketing materials reinforce the same benefits. Reinforcing your message this way guarantees that customers will automatically associate your product or service with the fulfillment of their needs—thus forgetting your competitors.

Strategy #3: Target Niche Markets

The third strategy for gaining a competitive advantage is to target niche markets, focusing on specific customer groups with unique requirements. Porter explains that narrowing your focus deepens your understanding of your customers, which enables you to serve them more effectively than competitors targeting the entire market. As a result, it’s easier for you to establish a strong position within your niche and cultivate a loyal customer base.

To implement this strategy, Porter suggests that you identify underserved customer groups, align your offerings with their needs, and develop targeted marketing campaigns to foster strong relationships within the niche community.

A Five-Step Process for Targeting Niche Markets

Jay Conrad Levinson (Guerrilla Marketing) expands on Porter’s advice with a five-step process for targeting niche markets.

Step 1: Define your target market. First, describe your product or service and the benefits it provides. Then, consider who wants these specific benefits, narrowing down to make this customer group as specific as possible. For example, you sell ergonomically designed office chairs that offer maximum comfort. You narrow down your customer group to people who work from home, suffer from back pain, and shop online.

Step 2: Research your target market by exploring three questions about your customers:

• What motivates their purchasing decisions? This information reveals what aspects of your business, product, or service your marketing strategy should emphasize to maximize your appeal.

• Which businesses do they already purchase from? This information reveals who your competitors are, which helps you focus on what you should do to differentiate your business and appeal to customers.

• What media do they engage with? This information reveals what marketing channels you should focus on to reach your target market.

Step 3: Outline how you’ll appeal to your target market by defining two details. First, how you want your target market to perceive your business and what you can do to promote this perception. Second, how your business, product, or service is better than what’s already on the market. Include both of these points in all your marketing materials.

Step 4: Choose your marketing channels, focusing only on the media that customers in your target market engage with the most.

Step 5: Track your marketing methods to identify strategies that resonate the most with customers in your market. One way to achieve this is to insert unique tracking codes into each of your marketing materials.