Essential Guide to Management Ideas for Business Thinkers – Competitive Advantage. Creating and Sustaining Superior Performance by Michael Porter.

March 9, 2011 by smsadmin
Filed under: Business Management

Competitive Advantage is the title of a book by Michael Porter, a Harvard Business School professor, which in the late 1980s became the bible of business thinkers. With its echoes of the popular ideas of comparative advantage expounded by David Ricardo, a 19th-century economist, it provided managers with a framework for strategic thinking about how to beat their rivals. Porter argued that:
Competitive advantage is a function of either providing comparable buyer value more efficiently than competitors (low cost), or performing activities at comparable cost but in unique ways that create more buyer value than competitors and, hence, command a premium price (differentiation).
You win by being cheaper, or you win by being different (which means being perceived by the customer as better or more relevant). There are no other ways.
Few management ideas have been so clear or so intuitively right. Although there have been business and management books that sold more copies in the last two decades of the 20th century, none has been as influential as Competitive Advantage.
Behind competitive advantage lay a novel way of looking at the firm as a series of activities which link together into what Porter called a value chain. For many readers, this was the eureka moment in the theory. Many writers have since developed concepts based on the metaphor of a linked chain of activities or groups of activities (or their close equivalent, processes). Each of the links in the chain adds value, that is, something that customers are prepared to pay for. Even a company’s support activities, such as training and compensation systems, can be links in the chain and sources of competitive advantage in their own right.

A brief history
Competition, and the ways in which one firm wins and another loses, has been a subject of study for decades. But there had been little focus on the competitive behaviour of the individual firm before Porter’s work.
Competitive Advantage was published in 1985 as “the essential companion” to Porter’s earlier work, Competitive Strategy (1980). Competitive Strategy considered competition at the industry level, whereas Competitive Advantage looked at it from a firm’s-eye view. “My quest”, said Porter, “was to find a way to conceptualise the firm that would expose the underpinnings of competitive advantage and its sustainability.”
Competitive Strategy (subtitled “Techniques for Analysing Industries and Competitors”) was an aide for ambitious young executives in the planning department to help them come up with grand ideas about what to do next. The book defined five factors that have an impact on a company’s profitability: customers, suppliers, substitutes, potential entrants into the industry, and competitors.
Competitive Advantage, however, was for the chief executive. Its subtitle was “Creating and Sustaining Superior Performance”.

Not only did it promise to enable senior managers to get ahead of the competition, it was also going to help them to stay there. “Sustainability” became a buzz word.
Porter’s activity-based view of the firm has been used to give concrete meaning to the historically woolly idea of synergy.

As he put it:
The ability to add value through competing in multiple businesses can be understood in terms of sharing activities or transferring proprietary skills across activities. This allows the elusive notion of synergy to be made concrete and rigorous.
The ideas in Competitive Advantage persuaded corporate chiefs to undertake more internal reflection. Previously, their firm’s identity was often described in terms of its relationship to others: its market share, for instance, or its relative size.

Porter made corporate navel-gazing respectable. In practice, many firms had difficulty in identifying all the discrete Porterian activities in their organisation, even in cases where they were confident that they knew what they were looking for – and many were not.
In a later book, The Competitive Advantage of Nations, Porter looked at how the choice of location by an internationalising business might be a source of competitive advantage. From this issue of location he was drawn on to consider clustering and how business clusters are nowadays “critical to competition”. In 1998 he listed the subjects of his current research as being: “Why do activity differences leading to distinct competitive positions arise? When do trade-offs occur between positions? What makes activities hard to imitate? How do activities fit together? How are unique positions developed over time?”
Apart from being a best-selling author, Porter founded a management consulting firm, Monitor. He is able to command as much as $100,000 for a one-hour presentation. His personal competitive weapon is differentiation, not low cost.