Choosing The Right Strategy

However beautiful the strategy, you should occasionally look at the results.

The term all business people are familiar with: that of competitive advantage is closely tied to a Harvard Business School professor Michael Porter. Although his two most influential books: Competitive strategy: Techniques for Analyzing Industries and Competitors and Competitive Advantage: Creating and Sustaining Superior Performance, were first published in the 1980-ies, they are still obligatory reading for managers who want to get a clue on how to gain and maintain competitive advantage. Rather than something negative, if properly managed, competition is a force that can bring out the best not only in companies but in national economies as well.

Professor Porter identified three generic strategies which determine the chances of profitability for a business either through choosing an industry that is profitable in itself or by positioning your business in a low-profitability industry in such a way as to generate superior return on your investment. These strategies are known as cost leadership (based on low cost production), differentiation (unique product qualities allow charging premium prices), and focus (on narrow market segments also known as niche markets). If chosen properly, these strategies will help a firm to leverage its strengths and protect itself against the adverse effects of the five forces that affect competitive power in an industry.

The first force is supplier power consisting of the number of suppliers and their other characteristics that force you to drive your prices down thus making you less competitive. Buyer power indicates the ability of buyers to dictate terms and drive the prices down. Competitive rivalry refers to the number and strength of companies providing the same services as you. The threat of substitution takes into account how easily your products and service can be substituted by similar ones. The amount of time and money it takes your rivals to enter the market is considered under the fifth force: threat of new entry.

This is a simplified version of a theory elaborated in books famous for their thickness and abundance of graphs and mathematical formulas. The man behind the theory who The Economist named the doyen of living management gurus was born in 1947. He started his career as an engineer and only later went to obtain an MBA and PhD in economics. During his student days he demonstrated his competitive spirit by successful participation in sports, golf in particular. His most recent interests involve attempts at applying business principles to health care system and advising governments on how to make their national economies more competitive which makes his consultation services in great demand.