Fundamental Wisdom

Michael E. Porter – the Bishop William Lawrence University Harvard Business School professor and seminal author of The Competitive Advantage of Nations – offers 13 groundbreaking essays organized by topic. These pieces, which first appeared in the Harvard Business Review, discuss how competition can address social issues.

Competitive advantage is created and sustained through a highly localized process. Differences in national values, culture, economic structures, institutions and histories all contribute to competitive success. Michael E. Porter

After reviewing the fundamentals of staying competitive, Porter explores market solutions to perplexing problems of commerce in contemporary America.

Competitive Forces

Porter leads off by breaking down how competition has become dramatically more intense, with trade barriers falling and nations deregulating communication, transportation and energy. He argues that competition stems from economics, not rival competitors.

Porter explains that an industry’s competitiveness is determined by the threat of new entrants, the bargaining power of suppliers and customers, the threat of substitute offerings, and the fight for position among competitors. He urges you to maximize your company’s strengths and minimize its weaknesses and to realize that the essence of strategy is to select and attain a unique position in the marketplace. Porter asserts that if you have a competitive advantage, you must make sure your strategy maintains it.

Companies should globalize first in those businesses and product lines where they have the most unique advantages. Michael E. Porter

He details how information technology powerfully influences lowering costs, creating differentiation strategies, spawning new business, and enabling regional companies to compete nationally and globally. To that end, he suggests exploring synergistic relationships among your firm’s current business units, understanding your core business, seeking diversification and defining how you generate value for shareholders.

The Environment

Porter adamantly rejects the prevailing corporate-versus-environmental paradigm that assumes environmental regulations increase costs and reduce competitiveness. He denies that environmental regulation is a zero-sum game and that restrictions on pollutants necessarily lead to cost increases. He says regulation can motivate environmentally friendly innovation and increase awareness of more efficient business practices. He further notes that pollution often signals poor design or inadequate production processes. 

The author details a study of 29 factories in the chemical industry that identified 181 waste-minimizing activities. Porter underscores that only one of the 181 activities caused a net increase in cost, and 68 of them led to increased product yields.

Inner Cities

Porter believes society needs a radical new approach to revitalizing inner cities, one that accounts for competition. He believes their density and proximity to resources can be a strategic advantage, and as with every point he raises, he backs his reasoning with knowledge and solid analysis.

Among the benefits that inner-city businesses offer, Porter lists strategic locations, strong local markers, potential regional clusters and access to available labor.

But altering the American system will not be easy. There is a natural tendency to limit change to tinkering at the margins, yet systemic change will be necessary to make a real difference.Michael E. Porter

Porter believes companies must expand their inner-city businesses, build local alliances, reallocate corporate philanthropy dollars, encourage government redirection of resources, enhance development sites, and establish job training and referral programs.

Health Care

Porter recommends incentives that encourage productive competition as a mechanism for lowering healthcare costs and sees universal coverage as an underlying necessity. He provides examples of how skewed incentives encourage unproductive competition. For example, he cites how the cost of malpractice insurance and malpractice lawsuits gives doctors an incentive to perform more procedures on more patients, make costly referrals, order pricey tests and increase fees.

A Capital Dilemma

Porter stresses that businesses in the United States operate at a competitive disadvantage because the national system for allocating capital is failing. He explains that the current system overemphasizes the short-term interests of shareholders who seek appreciation at the expense of long-term competitiveness.

Porter finds that, compared to Japan and Germany, the US system supports less investment and favors investments with readily identifiable returns. He offers countermeasures, including using incentives to align the interests of all stakeholders and expanding ownership to include employees, suppliers and managers. He counsels that reforming the US system of capital allocation will make America more prosperous and competitive.

Authority

Porter is the unchallenged authority on competition. This invaluable collection expresses his thoughts, analyses and suggestions with clarity, purpose, efficiency and directness. His ideas are grounded in clear-eyed common sense, and his only ideological leaning seems to be practicality. He argues against common myths and advocates a system of more efficient competition that will spread wealth to more Americans, make them healthier and protect their environment.

Porter’s positions seem unassailable and wise – this is the work of a true mentor. Any businessperson, anyone starting a business, anyone considering the political or social ramifications of competition, and certainly any business student or professor can learn from and take inspiration from Porter’s lectures.

Michael E. Porter’s books include Competitive Advantage and Competitive Strategy. Understanding Michael Porter by Joan Magretta offers a guide to Porter’s thought and work, as does Porter’s Five Forces by 50Minutes.com.