In his classic book, The Competitive Advantage of Nations, Harvard Business School professor Michael Porter outlines five forces that shape competition:
· New competitors enter the market
· Rivalry among existing competitors intensifies
· Substitute products arrive
· Buyers use their buying power to squeeze margins
· Suppliers assert greater bargaining power
Porter's book studies the reasons that some industries are destined to be more profitable than others. This is useful for businesses that can easily exit their original industry and dive into another, more profitable sector - but it doesn't give much hope to those of us who are locked into a niche from which there is no possible re-invention. But there are ideas in Porter even for those of us who can’t “start over.”
How do you optimize profit?
Some approaches adopted by businesses going through disruptive change include surveying customers or competitors, and/or changing the method of operation.
According to Porter, there are two major strategies used by businesses to make more profit than their competition:
1. Spend less than your competitor on production costs - without losing quality.
2. Charge more for your product or service - without increasing costs significantly.
We often misuse two of Porter's key terms
The term 'differentiation' is used by Porter to describe products for which buyers will readily pay a premium. Marketers often use the word “differentiation” to describe the reason they believe customers should buy their product. No. It's not about a few differences in features and benefits in your product. Your strategy needs to go deeper than that.
Marketers also use the term “lowest-cost producer” to refer to the cheapest price of an item or service. Again, incorrect.
The two key strategies for making your business more profitable than your competitors are very specifically about maximizing profit.
Spending less, or “cost leadership” in Porter's words, means bending your unique resources or capabilities until you can sustainably make the same product as your competitor for less than it costs them to make it.
Charging more, or “differentiation” means harnessing your abilities to build a product for which buyers will willingly pay more, without increasing your costs significantly to do so. If you can command a 10% premium, your costs must rise by less than 10%.
The magic is in the combination of these two factors, not necessarily in doing a little of each. Don’t shift your differentiator and then trim your costs, but develop your strategy to focus on accomplishing them in tandem.
Finally, he suggests applying each of these powerful techniques narrowly. If you can't be a cost leader or offer differentiated product to the whole market, then focus only on the market segment for which you can.
Good stuff. Why not go to your bookshelf and pull out that Drucker or Porter (or even Peters) business book that’s been sitting on your shelf and leaf thru it. The world has changed, but the basic tenets of business have not.
“An investment in knowledge always pays the best interest."
-- Benjamin Franklin, American inventor, statesman