Book SummaryCompetitive Strategy, by Michael Porter

1-Page Summary1-Page Book Summary of Competitive Strategy

In Competitive Strategy, Michael Porter—renowned economist, best-selling author, and Harvard Business School professor—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 Strategy Summary Part 1: Understand the Factors That Shape Your Market

According to Porter, before you can develop an effective competitive strategy for your business, you first need to understand five interdependent factors that influence the competitiveness and profit potential of the market you’re operating in:

1. Supplier influence
2. Buyer influence
3. New competitors
4. Alternative offers
5. Rivalry competitiveness

Let’s explore in detail how each of these factors shapes a market.

Factor #1: Supplier Influence

The first factor that shapes a market is how much influence suppliers have. Porter explains that suppliers with substantial influence can dictate pricing, product quality, and availability, potentially limiting competition and profitability. For example, in the diamond industry, a few large diamond mining companies exert significant influence over jewelry manufacturers and vendors by dictating prices, setting quality standards, and restricting sales.

According to him, a number of conditions enhance supplier influence over a market, including:

Condition 1) Limited Supplier Competition With No Substitute Goods

According to Porter, when there are only a few suppliers for a vital component, they have the power to...

Competitive Strategy Summary 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...

Competitive Strategy Summary 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...

Shortform Exercise: How Do the Five Factors Impact Your Market?

According to Porter, five factors shape a market’s competitiveness and profit potential: supplier influence, buyer influence, new competitors, alternative offers, and rivalry aggressiveness. Let’s explore how each factor impacts your market and the way your business operates.

Consider how many suppliers your business has to choose from, how many markets these suppliers serve, and how difficult or expensive it would be for you to switch suppliers. Write down at least one way your suppliers impact your ability to compete or generate profits.