Understanding Michael Porter (Literary Notes)

I’m currently reading and taking notes on Understanding Michael Porter by Joan Magretta.

ISBN: 9781422160596

What is competition

Strategy explains how an organization faced with competition will achieve superior performance.

If there were no competition there there would be no need for strategy or anything to outperform.

Thinking about competition as being the best is wrong and leads to competitive convergence. Over time, everyone looks alike and the only distinguishing difference is price (e.g. airline tickets, PCs). This erodes value for customers and companies.

War as a metaphor for competition is wrong. In business, there can be multiple winners so competition is more about serving customer needs than demolishing rivals.

Sports as a metaphor for competition is wrong. In sports there is one set of rules to be the best in. Companies can choose to make their own game.

Strategic competition is competing to be unique. Unique in value you create and how you create it. The focus is on creating superior value for the chosen customers, not imitating or matching rivals.

Competition is more like the performing arts than sports or warfare. It’s positive sum and innovative not zero sum and imitative.

Five forces

Most people think competition is a direct contest between rivals. Competition is about earning profits not winning a sale.

The industry’s structure is defined by:

  • Intensity of rivalry among existing competitors
  • Bargaining power of suppliers
  • Threat of substitutes
  • Threat of new entrants

The structure explains the industry’s profitability.

The strength of each force varies but are present in every industry.

Industry structure tends to be stable over time. Things change but structure takes a long time to change.

Profits is more complex with producers, suppliers, customers, and even future entrants.

  • A Moat or a Long Bridge

    In business strategy you’ll often hear a competitive advantage described as a moat, but most moats are more like a long bridge. The moat is the thing that prevents others from easily replicating another business. A long bridge takes a time build and is effectively a moat if it’s impractical to catch up or simply makes it a schlep.

  • Large Durable Business

    People often ask me in interviews where I see our company going in the coming years (which is more of a meta question asking about the exit strategy). I always say the same thing: the plan is to build a large durable business because if you do that, every option is available to you.

  • Venture Predation Is Predatory Pricing for Startups

    Predatory pricing claims are largely ignored by courts, but a version of it continues to happen with venture backed startups. A recent paper that is making waves in tech circles called Venture Predation shows how businesses like Uber, Bird, Moviepass, and more use large venture capital investments to undercut competition, build monopolies, and harm consumers.