I revisited “Understanding Michael Porter” by Joan Magretta. It’s a brief read, packed with practical insights from over 20 years of Michael Porter’s foundational work.
I recommend it to anyone involved in product development or looking to build their own company. It will empower you with actionable takeaways to create clarity on what truly matters to succeed.
This was my second or third time reading it, and each time, I reached the same realization: strategy is so much more than just considering differentiation or customer segment.
“A strategy explains how an organization, when faced with competition, will achieve sustainable superior performance.”
Porter’s work shows that competition extends beyond direct rivals in the industry. It also includes substitutes that customers may use instead of your product, or the suppliers you must work with.
Another key takeaway is that strategy is not about being the best. Interestingly, Porter does not advocate for pursuing the largest market share. Instead, he defines superior performance in terms of profits. That’s why the definition of competition is broader than we usually think.
Superior profits can result from:
- Commanding a premium price for your products and services
- Establishing a lower cost structure than your competitors
- A combination of both
A critical aspect of strategy is that it must be sustainable. A strategy loses value if competitors can easily replicate it, undermining your advantages and profits.
Next, I’ll introduce two frameworks from Michael Porter: one about the five tests for a compelling strategy, and the other about the forces of a specific industry to help find your place within it.
Passing the strategy tests
While Porter’s definition provides the destination—sustainable superior performance—his five strategic tests offer the roadmap. These criteria help translate abstract strategic thinking into concrete organizational choices that create genuine competitive advantage.
These include a distinctive value proposition, a tailored value chain, trade-offs that differ from competitors, consistency throughout the value chain, and continuity over time.
Distinctive value proposition
Your value proposition must be distinct from competitors. You need to offer something unique that sets you apart.
If you’re targeting the same customers, meeting the exact needs, and pricing similarly to your competitors, you don’t have a proper strategic position.
A value proposition addresses three critical questions for your product:
- Which customers will you serve? You can’t create a product that serves every customer in the market. Being intentional about your specific target market segment is essential.
- Which needs will you meet? This question determines the products, features, and services you offer and how they will better satisfy your customers’ needs.
- At what relative price will you offer your product? You must decide whether to set a premium or discounted price compared to competitors. Customers who feel underserved by existing options may pay a premium for a product that better addresses their specific needs. Conversely, overserved customers might switch to cheaper alternatives that fulfill their limited requirements.
Tailored value chain
Organizations perform various activities to deliver their products, such as development, supply chain management, and sales operations. The sequence of activities a company undertakes to design, produce, sell, deliver, and support its products is called the value chain.
To effectively deliver your value, you need a unique and customized value chain. If your strategy can be replicated by a generic value chain, it lacks strategic relevance.
When you implement unique activities to deliver your value proposition, competitors will find it challenging to match your approach. Attempting to do so would likely prevent them from serving their current customers well, creating a significant barrier against copying your strategy.
Trade-offs different from rivals
Trade-offs arise when strategic choices are incompatible.
Effective strategies often involve multiple trade-offs, making it difficult for competitors to replicate your approach.
For example, certain product features may conflict; what best serves one customer segment may not satisfy another. Similarly, how activities are organized to provide one type of value may not suit delivering a different kind of value.
Fit across the value chain
Great strategies are shaped by how well each activity aligns with and strengthens a firm’s competitive advantage. This happens because activities are interdependent: the value or cost of one activity is influenced by how other activities are performed.
Strong alignment across activities can amplify competitive advantage by reducing costs or increasing customer value and price.
There are three types of fit:
- Essential fit: Each activity aligns with the company’s value proposition and contributes positively to its core themes.
- Complementing or reinforcing fit: Synergies exist between activities, creating additional value together.
- Substitution fit: The execution of one activity allows for eliminating another, simplifying the value chain.
A strong fit across your value chain makes it harder for competitors to replicate your strategy. Since activities are interlinked, rivals face significant challenges identifying which ones to imitate. They would need to replicate numerous interconnected actions to match your approach, making it considerably more difficult to compete.
Continuity over time
Developing a genuine competitive advantage takes time, so maintaining consistent focus is crucial to nurture this advantage.
Silicon Valley obsesses over quick pivots and “disruptive” transformations. However, Porter emphasized that strategic continuity leads to a more substantial company:
- Continuous strategy reinforces the company’s brand over time. Customers learn to rely on the brand as they become familiar with it.
- Continuity promotes ongoing improvement in operations and enhances alignment of activities.
- It enables suppliers, distribution channels, and other partners to bet on the company, improving its value proposition.
Porter argues that organizations change their strategies too frequently, believing they must adapt to the latest market trends. In contrast, the most successful teams remain focused on their core mission, selectively pursuing initiatives that align with their strategic choices. This focus allows for mastery and compounds advantages over time.
These five tests form the foundation of a genuinely distinctive strategic position that enhances competitiveness and differentiates the company from rivals in a defensible manner.
The essence of competitive advantage lies in the unique activities a company undertakes compared to its competitors. These differences can lead to variations in either relative price or costs, forming the basis of a sustainable competitive position.
Understanding the Five Forces framework
Porter’s main argument in his Five Forces analysis is that industry structure influences how economic value is distributed among companies, customers, suppliers, substitutes, and potential new entrants.
By understanding the industry structure, you can gain insight into the average profitability of firms within it, which helps determine the industry’s attractiveness.
- Threat of new entrants: How easily can new players enter your market? High entry barriers (patents, brand loyalty, significant capital requirements) protect profitability by keeping competitors at bay.
- Bargaining power of suppliers: How much leverage do your suppliers have? When suppliers are few or their products are unique, they can squeeze your margins by charging more. Product teams should consider their dependence on specific suppliers and whether alternatives exist.
- Bargaining power of buyers: How much leverage do your customers have? Influential buyers can force prices down or demand more value for the same price. When customers have many alternatives, or your product isn’t differentiated, they gain the upper hand in negotiations.
- Threat of substitutes: What other options could address your customers’ needs? This threat is often underestimated. Your true competition isn’t necessarily other tools in your category; it can also be spreadsheets, emails, or even notes that do “just enough” to satisfy customers.
- Competitive rivalry: How intense is the direct competition within your market? When there are many competitors or when they are closely matched, price wars and feature races can diminish profitability for everyone in the industry.
This framework isn’t a template for your next strategy day presentation; it serves as a lens to understand how industry structure influences average prices and costs, ultimately affecting profitability.
The objective isn’t to compete within these forces, but to identify a position where the forces are weakest or can be leveraged to your benefit.
True advantage appears in the balance sheet
With a broader perspective on competitive forces, you can evaluate how to create genuine advantage. This advantage isn’t measured by market share, NPS scores, or positive testimonials; it’s measured by sustainable profitability.
For instance, Ferrari maintains impressive profit margins by deliberately restricting production volume and avoiding mass-market appeal. Their strategic discipline results in tangible economic outcomes that competitors chasing broader appeal cannot match.
Absolute strategic clarity is evident in your financial statements. Your position within the Five Forces influences your ability to command premium prices, reduce costs, or ideally, achieve both. This is where real results manifest.
This also resonates with my main takeaway from the “7 Powers” book. The job of a product manager in helping the company win goes beyond defining features and focusing on delivery. The end goal is to win.
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Porter’s insights have reinforced my belief that building exceptional businesses is not just about creating more value. It’s about creating differentiated and defensible value through strategic clarity, disciplined trade-offs, and relentless focus on unique positioning.
Sometimes that means doing less, but with a clear understanding of what really matters. Anything else can become costly busywork. It may mean watching your competitors introduce features that you intentionally didn’t develop. It also means recognizing that you can’t serve every customer segment equally well.
The narrower your focus, the deeper your execution can be. This is perhaps the most important realization for anyone working in product development or building a business: Strategic discipline in what you choose not to do creates the space for excellence in what really matters to your specific customers.