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Old lessons revisited

Old lessons revisited

Michael Porter's 1985 classic still has plenty to say to today's generation of business leaders.

The airline was a roaring success. A brashly marketed no-frills, low-fare insurgent which quickly made inroads into its full-service competitors. Expansion beckoned, and it started adding a flashier service. In doing so, it lost sight of the reasons for its success and compromised its original strategy for growth's sake, Harvard Business School professor Michael Porter wrote in his 1985 classic, Competitive Advantage.

Porter was describing the failure of Freddie Laker's Skytrain, the grand-daddy of all international budget airlines, in 1982.

He could as easily have been talking about Australia's Virgin Blue, an airline whose chief shareholder Chris Corrigan lamented in 2004 had become trapped in a "pincer movement" between Qantas and its even-lower-rent offspring JetStar, leaving Virgin Blue stranded in marketing no-mans land.

Plenty more of Porter's lessons are still being painfully re-learned: companies that copycatted successful strategies and failed, never understanding why, or companies that sank the value of whole industries in strategic blunders on product or pricing.

Porter writes in clear but exacting detail about how firms can succeed in competition with each other; how they uniquely provide value in either lower price or higher quality which customers will consistently pay for over its rivals.

Use his analysis the right way and it will show managers whether a diversification strategy is likely to work and whether companies should try to compete in multiple industries.

It also allows concrete examination of that elusive thing called "synergy", the buzzword propping up thousands of merger and acquisition press releases.

Before Porter, competitiveness had been thought of as just size or market share. He showed instead how different breeds of company - cost leaders, differentiators, and "focusers" or niche players within industries - can beat the industry average or even make whole industries more attractive to investors and customers.

In his 1980 work Competitive Strategy, Porter explains how companies choosing a strategy for themselves first have to figure out how it will fit with the five forces that shape all industries.

Shipping lines, for example, in a commoditised business of pure competition, would learn that they were prey to: the threat of new entrants (very strong); bargaining power of customers (even stronger); rivalry among existing players (intense); bargaining power of suppliers (variable), and; the threat of substitution (mercifully, almost non-existent).

Lines could then try to figure out whether to outstrip rivals on cost, such as building ever-bigger ships for economies of scale. Or they could differentiate by service quality, such as sophisticated, but expensive land-side just-in-time logistics. Some tried both. Some perhaps pondered a sixth force, the strong barriers to exit from the shipping industry. (Who wants to buy ships in the industry's frequent slumps?)

In Competitive Advantage, Porter showed how these industry-based strategies could be used to run real companies.

The book's great insight is that strategy is not separate from execution, or is something to be handed down through the clouds from the C-suite.

Strategy is everyone and every activity in the company, he says. "Competitive advantage cannot be understood by looking at the firm as a whole," he says, rather counter-intuitively.

Porter's management "theory of everything" is the "value chain" which breaks down all the company's activities which design, produce, market, deliver and support products, and diagnoses where competitive advantage may lie.

"These activities create value for the buyer and are the basic units of competitiveness," he says, before spending 500 pages dissecting in detail how they fit together, or have to be traded off, to get an advantage.

"Strategy is no longer a broad vision, but a particular configuration of activities a firm adopts compared to its rivals."

Porter's analysis of industries is well-grounded in conventional economics, he says. But there is little precedent for the analysis of companies in Competitive Advantage, where he described the value chain as "solving a puzzle" which would systematically show the essential differences between companies that are competitive and those that are not.

VERDICT

Michael Porter was writing in the decade when Margaret Thatcher and Ronald Reagan were making the idea of competitiveness, even business itself, fashionable again. Superficially, it shows its age: many of his examples come from manufacturing industry in the United States, already being decimated by Asian competitors. But the Japanese focus on analysing how each activity in a company affects another shows that he was being read diligently in Tokyo and Osaka too, and doubtless now in Shanghai.

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