Having productive conversations about business strategy can be challenging because the term itself is often understood to mean different things by different people. Many people use “strategy” interchangeably with words like “plan” or “approach,” whereas others use it in a narrower, more specialized sense to refer to the way that businesses position themselves vis-a-vis competitors. In order to more effectively facilitate strategy meetings, I realized that I need to improve my ability to articulate what strategy entails.

When I decided to brush up on strategy, Michael Porter was the first author that came to mind. His article “What is Strategy” was one of my first reading assignments in business school, and it left a lasting impression on me. This time, I decided to delve deeper into his work with Understanding Michael Porter: The Essential Guide to Competition and Strategy. The book, co-written by Porter himself an editor of Harvard Businesss Review, aims to share all of Porter’s key ideas about business strategy in an accessible format. In this blog post, I will share the main lessons that I learned from the book.

Differentiation, Not One-Upsmanship

The book’s first main idea is that strategy is about differentiation and not one-upsmanship. One-upsmanship is when a business attempts to do the same sort of things that it’s competitors do, but in a superior manner. Porter cautions that this approach leads to a phenomenon called competitive convergence, where rivals’ offerings start to become identical, and they are left with nothing to compete on besides price, which erodes profitability for all businesses involved.

The book’s first main idea is that strategy is about differentiation and not one-upsmanship. One-upsmanship is when a business attempts to do the same sort of things that it’s competitors do, but in a superior manner. Porter cautions that this approach leads to a phenomenon called competitive convergence, where competing offerings start to become identical, and businesses have nothing left to compete on besides price, thus eroding profitability for everyone involved.

Porter says that strategy is fundamentally about differentiation, which means doing things differently from competitors. When Porter talks about differentiation, he emphasizes that real, meaningful differentiation always involves two key things: 1) offering the customer a unique value proposition, meaning something that is valuable in a different way than other offerings on the market , and 2) structuring the company’s internal operations differently than competitors. The following sections will review both of those things and how they relate.

Finding A Unique Value Proposition

Porter argues that the main customer-facing part of strategy is to find a unique value proposition. A value proposition can be considered unique if it satisfies some set of customer needs in a categorically different way than other offerings on the market.

To illustrate this concept, let’s use the restaurant industry as an example. Restaurants can differentiate themselves by focusing on specific kinds of customer needs such as health-consciousness, gastronomy from a particular region, speed of service, dining atmosphere, or total cost. In deciding how to position itself along all of those dimensions, the most strategically important thing for the restaurant to do is to target a different set of customer needs than its competitors.

What has a better value proposition, a table-service restaurant that offers high-touch service and dishes cooked to order in a comfortable dining atmosphere, or a street food stand that offers a limited menu with speedy service and low prices? Neither of those options is the “best” for all customers, because each one fulfills a different set of customer needs. Even though table-service could be considered a more upscale option, it’s not what all customers are looking for. For example, when I am out on a bike ride by myself, I usually prefer to eat at a street food stand because I value their low price, and I prefer to avoid the wait time associated with table service and dishes cooked to order. Porter would say that in this instance, my needs would be “overserved” by a table-service restaurant, in the sense that I would be overpaying for a level of service that I don’t value. Conversely, my need to get the food quickly and affordably would be “underserved” by the table-service model.

The essence of customer-facing strategy is to find a set of needs that are underserved, and then create a unique offering designed specifically to address those needs. To quote Porter, “The key to superior performance is not to better one’s rivals, but to escape their definition of the market and redraft the boundary.” Successful strategies depend on offering a unique value proposition that is different from competitors, similar to how street food stands and table-service restaurants provide a qualitatively different mix of products and services.

Tailoring your activities

Porter argues that a strategy is only tenable if a business must custom-tailor its internal operations in order to deliver its unique value proposition.

To illustrate how that is successfully done, the book reviews how IKEA structured its operations in order to support its value proposition of functional designs at a low price. One of the defining characteristic’s of IKEA’s operations is the flat-pack, where furniture comes packed in a flat box, to be assembled later. The flat-pack enables a variety of cost-savings that are passed onto the customer.

For example, the flatpack allows IKEA to fully-utilize the cubic space when shipping the products from the factory to the store. The disassembled furniture also allows customers to take their furniture back to their house in their own car, whereas pre-built furniture is too bulky for traditional cars and thus requires professional deliverymen, which entails additional cost. Because customers can self-deliver their own furniture, IKEA is also able to avoid paying top-dollar for urban locations, and can instead opt for cheaper real estate outside of city centers. Because they have cheaper real estate, they can warehouse their full catalog of inventory in every store, whereas traditional furniture showrooms typically have only a limited selection in-store and need to make customers wait in order to have certain items delivered. Because IKEA’s full inventory is available to browse in-store , there’s less need for salespeople, and IKEA instead replaces them with detailed labelling for all of it’s products, thus saving the company money on salespeople’s salaries. IKEA’s customization also extends further up the supply chain. For example, in order to enable the flat-pack operations, the company has their own-team of in-house designers that specialize in the design of assemblable furniture.

IKEA’s business operations are very hard-to-copy because they consist of so many different complimentary, mutually-reinforcing parts. This is the essence of how a good strategy shapes the way that a company works on the inside.

Trade-Offs Over Flexibility

Another of Porter’s key arguments is that good strategies always involve explicit trade-offs, and come at the expense of maintaining the flexibility to do many different things at once. Porter asserts that “no strategy is meaningful unless it makes clear what the organization will not do. Making trade-offs is the linchpin that makes competitive advantage possible and sustainable.”

For example, IKEA’s decision to make their furniture modular and inexpensive precludes them from using certain materials, and producing certain kinds of designs. That trade-off is worthwhile, though, because all other aspects of the company’s strategy and operations depend on this trade-off. If IKEA were to move away from modular furniture, they might need to redesign their logistics network, find stores at new locations, and market to a different demographic at a different price point.

Porter cautions that businesses shouldn’t hesitate to make trade-offs that limit their flexibility to pursue alternative strategies. When companies try to be the best at everything, they end up being the best at nothing. Porter cites a case study where McDonald’s tried to start allowing customers to customize their sandwiches, instead of having just a single option for each sandwich. The initiative was a disaster, because a huge part of what enabled McDonald’s to offer fast service and low prices was their streamlined process that didn’t accommodate custom orders. When they tried to take a position that ran counter to their established strategy, they lost what made them unique. Porter describes this dynamic by saying “When you substitute flexibility for strategy, your organization never stands for anything or becomes good at anything.”

Key Takeaways

The book effectively drives home the point that successful strategy is all about finding ways to differentiate a business from competitors instead of engaging them in head-to-head competition. It was also interesting to note that the most consequential strategic decisions are as influential to a business’s internal operations as they are to its relationship with customers. Put in other words, it was interesting to note that businesses don’t independently create a customer-facing strategy, and an internal operations strategy. The best strategic aha moments shape both of those at the same time.