Business Strategy Economics

On Competition (Summary)

by Michael E. Porter

Why have the world's airlines, despite decades of innovation, new technology, and access to the best business minds, collectively lost billions of dollars? The answer isn't bad management; it's the structure of the industry itself. Michael Porter reveals that in some industries, even the most brilliant companies are set up to fail, and the only way to win is to change the game entirely.

Strategy Is Not Operational Effectiveness

Companies often confuse being 'better' (operational effectiveness) with having a strategy. Strategy isn't about running the same race faster; it's about choosing to run a different race altogether. Operational effectiveness is about doing things right, while strategy is about doing the right things.

Southwest Airlines didn't try to offer better meals or more luxurious seats than its rivals. It built a unique strategy around low costs by flying one type of plane (Boeing 737), using secondary airports, and offering no assigned seating. This wasn't a 'better' version of American Airlines; it was a completely different, and uniquely profitable, model.

An Industry's Structure Determines Its Profitability

The average profitability of an industry is not a matter of luck. It is determined by the collective strength of five competitive forces: the threat of new entrants, the power of suppliers, the power of buyers, the threat of substitutes, and the intensity of rivalry. A strategist's job is to position the company where these forces are weakest.

The soft drink industry is highly profitable because the forces are weak: powerful brands create high barriers to entry, bottlers (buyers) have little power, there are few direct substitutes, and rivalry is disciplined between giants like Coke and Pepsi. In contrast, the airline industry is chronically unprofitable due to low barriers to entry, powerful suppliers (Boeing, Airbus), price-sensitive buyers, and cutthroat rivalry.

A Great Strategy Requires Trade-Offs

True strategy is defined as much by what a company decides not to do as by what it does. Making clear trade-offs is essential because it makes a position unique and difficult to copy. A company that tries to be everything to everyone will have no competitive advantage.

IKEA's promise of low-cost, stylish furniture is built on a series of trade-offs. To keep prices low, they choose not to assemble furniture for you, not to offer home delivery as a standard, and not to have extensive sales staff. A competitor can't copy IKEA's prices without also copying its trade-offs, which would alienate their existing high-service customers.

Companies Can Create Shared Value

Porter argues that businesses can gain competitive advantage by solving social problems. 'Creating Shared Value' (CSV) is not charity or CSR, but a new way to achieve economic success by identifying business opportunities in social needs.

The food company Nestlé addressed the challenge of low-quality, low-yield coffee from its farmers by investing in them directly. By providing technical assistance, better plant stock, and financing, they improved the farmers' livelihoods and environmental practices (social value) while securing a stable, high-quality supply chain for their Nespresso brand (economic value).

Go deeper into these insights in the full book:
Buy on Amazon
Listen to the full audio book with an Audible Free Trial.
As an Amazon Associate, qualifying purchases help support this site.