Suppose you could have a chat about your business with Professor Michael Porter of
Harvard, the noted academic and consultant whose concepts are central to the
practice of strategic management. Here’s your chance to ‘‘listen in’’ while he answers
the questions he is frequently asked by practitioners who solicit his advice. In her new book,
Understanding Michael Porter: The Essential Guide to Competition and Strategy (2011),
award-winning author Joan Magretta poses such questions in a lengthy ‘‘interview’’ with
Professor Porter. As the former strategy editor of Harvard Business Review, Magretta knows
Porter’s research well, having worked with him on numerous publications. In this brief
adaptation of their discussion, Professor Porter:
B Delivers warnings on the most common strategy mistakes.
B When it comes to dealing with disruptive technology, he cautions managers to be sure
they’ve rigorously identified the underlying source of the disruption.
B On the relentless pressure to find growth, he offers ways to approach it without damaging
strategy and profitability.
B He advises executives on how to deal with the capital markets, which, he maintains, have
become toxic for strategy.
B He addresses the limitations of business models, as opposed to strategy, and why the
distinction between the two matters.
B And he offers advice on managing the planning process itself.
Most common management strategy mistakes?
The granddaddy of all mistakes is competing to be the best, going down the same path as
everybody else and thinking that somehow you can achieve better results. So many
managers confuse operational effectiveness with strategy.
Another common mistake is confusing marketing with strategy. It’s natural for strategy to
arise from a focus on customers and their needs. So in many companies, strategy is built
around the value proposition, which is the demand side of the equation. But a robust strategy
requires a tailored value chain – it’s about the supply side as well, the unique configuration of
activities that delivers value. Strategy links choices on the demand side with the unique
choices about the value chain (the supply side). You can’t have competitive advantage
without both.
I’d have to say that the worst mistake – and the most common one – is not having a strategy
at all. Most executives think they have a strategy when they really don’t, at least not a
strategy that meets any kind of rigorous, economically grounded definition.
DOI 10.1108/10878571211209305 VOL. 40 NO. 2 2012, pp. 11-15, Emerald Group Publishing Limited, ISSN 1087-8572 j STRATEGY & LEADERSHIP j PAGE 11
Joan Magretta is a senior
associate at the Institute for
Strategy and
Competitiveness at Harvard
Business School
(jmagretta@
mba1983.hbs.edu). Her
new book is Understanding
Michael Porter: The
Essential Guide to
Competition and Strategy.
Adapted from Understanding
Michael Porter: The Essential
Guide to Competition and
Strategy by Joan Magretta q
Harvard Business Press, 2011.
Printed by permission of the
publisher. All rights reserved.
Obstacles to good strategy?
Most managers hate to make trade-offs; they hate to accept limits. They’d almost always
rather try to serve more customers, offer more features. They can’t resist believing that this
will lead to more growth and more profit.
Then there is the host of strategy killers in the external environment. These range from
so-called industry experts to regulators and financial analysts. These all tend to push
companies toward what I call ‘‘competition to be the best’’ – the analyst who wants every
company to look like the current market favorite, the consultant who helps you benchmark
yourself against everyone else in the industry, or who pushes the next big thing, such as the
notion that you’re supposed to delight and retain every single customer.
Let’s take this last idea as an example. Strategy is not about making every customer happy.
When you’ve got your strategist’s hat on, you want to decide which customers and which needs
you want tomeet. As to the other customers and the other needs, well, you just have to get over
the fact that you will disappoint them, because that’s actually a good thing. I also believe that as
capital markets have evolved they have become more and more toxic for strategy. The
single-minded pursuit of shareholder value, measured over the short term, has been
enormously destructive for strategy and value creation. Managers are chasing the wrong goal.
How to grow a business without undermining strategy?
The pressure to grow is among the greatest threats to strategy. And I’m referring here to
growth within a business, not diversification, which is equally challenging. Too often,
companies believe that any growth is good growth. They have a tendency to
overshoot, by adding product lines, market segments, or geographies that
blur uniqueness, create compromises, reduce fit, and ultimately undermine
competitive advantage.
If your competitor has a good idea, learn from it, think about what that
innovation accomplishes, but don’t just copy it. Figure out how the idea
could be adapted and modified in order to reinforce your strategy and what
makes you unique. You don’t have to jump on every trend. But if the trend is
relevant, tailor it to your strategy.
Second, deepen your strategic position, don’t broaden it. A company can
usually grow faster – and far more profitably – by better penetrating needs
and customers where it is distinctive than by slugging it out in potentially
higher growth arenas in which the company lacks uniqueness. So the first
place to look for growth is to deepen your penetration of your core target of
customers. The common mistake is to settle for 50 percent of your target
segment when 80 percent is achievable. You can shoot for true leadership
when the customer target is properly defined not as the whole industry, but
as the set of customers and needs that your strategy serves best. Going
deeper allows you to leverage all your advantages and improve profitability.
Deepening a strategic position in this way involves making the company’s
activities more distinctive, strengthening fit, and communicating the
strategy better to those customers who clearly benefit from what you
uniquely do. Gaining 10 percent share in another segment where you have
no advantage will often damage your profitability.
‘‘ Strategy is not about making every customer happy. When
you’ve got your strategist’s hat on, you want to decide which
customers and which needs you want to meet. ’’
PAGE 12 jSTRATEGY & LEADERSHIPj VOL. 40 NO. 2 2012
Third, expand geographically in a focused way. If you’ve penetrated your strategic
opportunity at home, there’s always the rest of the world.
What if none of those approaches to growth are feasible?
I think many more companies should pay higher dividends rather than take enormous risks
trying to grow beyond the capacity of their strategy and their industry structure. Don’t set
yourself up for failure. Paying dividends fell out of favor years ago. It became a signal that the
management team had no imagination. And that’s what gives rise to AOL Time Warner and
so many other value-destroying growth plans and deals. The nice thing about dividends is
that they’re aligned with economic value. You can’t pay a dividend unless you create
economic value and that’s a sign you’re actually making good choices about how to
compete.
Where does disruptive technology intersect with your thinking about strategy?
A disruptive technology is not any new technology. Many new technologies are not
disruptive. Nor is it any big technological leap, because many big leaps are not disruptive. A
disruptive technology is one that invalidates value chain configurations and product
configurations in ways that allow one company to leap ahead of another and/or make it hard
for incumbents to match or respond because of the existing assets they have. So a
disruptive technology is one that would invalidate important competitive advantages.
The Internet offers a classic case. It was disruptive where the mechanism for delivering
information was fundamental to the product or service, where the business, in essence, was
the delivery mechanism. Travel agents, for example, or the recorded music business. But in
other cases, the Internet wasn’t disruptive because it was simply one more channel for
communicating with customers or suppliers.
Two questions will tell you whether you’re dealing with a disruptive technology or not. First, to
what extent does it invalidate important traditional advantages? Second, to what extent can
incumbents embrace the technology without major negative consequences for their
business? If you stop and ask those questions, you’ll see that true disruptions are not so
common, and typically affect no more than 5 to 10 percent of all industries over any given
decade.
Of course, managers should always be on the lookout for potentially disruptive changes. The
advice they get tends to focus on just one form of disruption: a simpler and less costly
technology is improved and gets good enough to serve a need that’s currently met by a more
complex and more costly technology. To use my value proposition terms, the customers’
needs were being over served by the ‘‘old’’ technology. The new one meets just enough of
their needs at the right price. Disruption from below is an example of a focus strategy. A
focuser with a disruptive technology can enter your industry and ultimately grow to occupy a
major position. This is the Southwest Airlines story.
But other forms of disruption play a role in strategy. The threat can come from above. You can
have an advanced technology or a richer approach that performs at a high level but that can
be simplified or streamlined to meet less sophisticated needs at much lower cost.
‘‘ Many more companies should pay higher dividends rather
than take enormous risks trying to grow beyond the capacity
of their strategy and their industry structure. ’’
VOL. 40 NO. 2 2012 jSTRATEGY & LEADERSHIPj PAGE 13
In the context of innovative new businesses, is a business model the same thing as
a strategy?
If you’re starting a new business and you’re not yet sure whether or how it’s going to work, the
business-model concept helps you to focus in on the most basic question of all: How are we
going to make money? What will our costs look like? Where will our revenue come from? How
can this business be profitable? There are different ways of getting revenue and different
ways of managing costs, and the business model lens can help you to explore those.
But the business model doesn’t help you to develop or to assess competitive advantage,
which is what strategy aims to do. Strategy goes beyond the basic viability question, Can we
make money? Strategy asks a more complicated question, How can we make more money
than our rivals, how can we generate superior returns, and then, ‘‘How can we sustain that
advantage over time?’’
So the business model is best used as the most basic step in thinking about the viability of a
company. If you’re satisfied with just being viable, stop there. If you want to achieve superior
profitability (or avoid inferior profitability) and stay viable, then strategy – as I define it – will
take you to the next level.
Is strategy relevant when there’s no existing industry or when conditions are still so
fluid that there is no discernible industry structure and no direct competitors?
Strategy is relevant for any organization at any point in its trajectory. How to develop and
sustain a competitive advantage is the core question that every organization has to answer if
it’s to be successful and to prosper. In emerging industries there’s a lot of
experimentation. What will the product ultimately look like? What will the
distribution system look like? Will the product or service scope produce a
stand-alone industry, or will this new idea become part of a larger or existing
industry?
There’s more uncertainty about the shape of things, but the five forces
exercise is fundamentally the same with one big exception: instead of
analyzing what already exists, you’re forecasting. And you probably know
quite a lot about all of the five forces but one. You know the customers you’re
targeting. Are they likely to be price sensitive? You know who your suppliers
are or who they are likely to be. How powerful will they become? You know
the substitutes and can identify the likely entry barriers. What you don’t have
yet are actual rivals. That’s where you need to think through who those might
be. Will the rivals most likely come from adjacent industries? Or from
companies that already exist in other countries? Or will the likely rivals be
new start-ups?
There is no such thing as a market where competition is irrelevant, as nice as
that might sound. The idea that innovation allows you to ignore competition
is a fairy tale. So you have to have a hypothesis for how the industry might
take shape once there is an industry. Early on, there are many paths the
evolution can take, and decisions you and others make over time will begin
to lock in the basic economics, making industry structure less fluid. So it’s
crucial to ask the basic questions about the five forces, so that you can
make choices that will put the industry on the best possible path.
‘‘ The idea that innovation allows you to ignore competition is a
fairy tale. So you have to have a hypothesis for how the
industry might take shape once there is an industry. ’’
PAGE 14 jSTRATEGY & LEADERSHIPj VOL. 40 NO. 2 2012
Advice on the strategic planning process?
I think there are a couple of keys to successful strategic planning. One is that you need to
bring together the whole team responsible for a particular business, and they need to do the
plan together. You can’t divide up the work and then try to staple it together at the end.
Strategy is about the whole enterprise, not the individual pieces. That’s a foundational
principle of good strategy. The danger with sending people off to do their own functional
plans is that you’ll end up with a series of unconnected ‘‘best practices,’’ not a coherent
strategy. That’s why a strategic plan needs to involve the whole management team working
together to think about the industry, the competitors, the opportunities, the value chain, and
then ultimately make some choices about positioning and direction. Then, the team needs to
develop the implications for action.
I believe it’s beneficial to have a formal strategic planning process, perhaps once every year
or two, and then quarterly reviews, but you can’t let it be simply about budgeting and making
guesses about next year’s growth rate. Planning needs to support thinking rather than drive
it out.
Corresponding author
Joan Magretta can be contacted at: jmagretta@mba1983.hbs.edu
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