Sachin Rekhi

Michael Porter, long-time professor at the Harvard Business School, is often considered the father of the modern strategy field. He published his groundbreaking classics, Competitive Strategy and Competitive Advantage, in 1980 and 1985, went on to publish 20 more books, and ultimately became the most cited author in business and economics. While product managers may have heard of Porter's popular frameworks like Porter's five forces, most don't know how to leverage his ideas in their day-to-day role. This 4-part series on understanding Michael Porter will help product managers translate Porter's teachings into actionable insights for developing their own product strategies.

A strategy explains how an organization, faced with competition, will achieve sustainable superior performance

Product managers often end up calling their product roadmap, vision, or objectives a strategy, but to Porter, a strategy is something far more specific. Porter says a strategy explains how an organization, faced with competition, will achieve sustainable superior performance. The need for a strategy arises from the fact that every organization faces competition, either from direct competitors in your industry or from substitutes the customer can use in place of your product. This reality requires you to come up with a plan to outperform your rivals or end up outperformed by them. To Porter, superior performance doesn't refer to market share but instead to profits. Superior profits result from either being able to command a premium price point for your products & services, establishing a lower cost structure than your rivals, or some combination of the two. The final critical keyword in the definition of a strategy is that it is sustainable. A strategy is not sustainable if your rival can simply copy it and thus deteriorate your advantage. And so barriers need to exist in order to ensure you can maintain your superior performance in the face of competitive rivalry.

The reality is that simply having a strategy that meets Porter's definition doesn't necessarily make it an effective one. To help guide practitioners, Porter ultimately came up with 5 tests that he believes any strategy must pass in order to be compelling. These include a distinctive value proposition, a tailored value chain, trade-offs different from rivals, fit across value chain, and continuity over time. Understanding each of these is critical to developing your own compelling product strategy.

Distinctive Value Proposition
A value proposition answers 3 critical questions for your product:

1) Which customers are you going to serve? The reality is its impossible to build a product that will serve every customer in the market well. Given this, it's absolutely critical to be intentional on what particular segment of the market you are going to go after. While not required, it's often advantageous to find a segment of customers that are overlooked or avoided by the rest of the industry.

2) Which needs are you going to meet? This will ultimately boil down to what products, features, and services you'll offer and how they will better meet the needs of your customers.

3) At what relative price will you offer your product? You'll need to decide are you offering your product at a premium price point or a discount relative to rivals. Customers who are currently underserved by rivals will be willing to pay a premium for a product that better addresses their particular needs. Customers who are overserved by rivals will switch to cheaper products that can meet their more limited needs at a more attractive price point.

An effective strategy must have a value proposition that is different from your rivals. If you are trying to serve the same customer with the same needs and sell to them at the same relative price, it'll be nearly impossible to supplant the existing incumbents in the market.

Given the vast set of customer needs in most markets, it's also important to realize that there will likely be multiple winning value propositions in the market. Not just one "best" value proposition. Take for example the fast food market. McDonald's is a winner in fast burgers. But In-N-Out thrives on slow burgers. It's customers are happy to wait ten minutes (an eternity by McDonald's standard) to get non-processed fresh burgers cooked on home-made buns. Their distinctive value props have enabled multiple winners in the market.

Tailored Value Chain
Organizations need to perform a variety of activities to deliver their product, including developing the product, managing a supply chain, operating a sales team, etc. This sequence of activities your company performs to design, produce, sell, deliver, and support its products is called the value chain.

A great strategy is one where your value chain is tailored to best meet your specific value proposition as well as is distinctive from your rivals. If the activities you perform to develop your product is the same as your rivals, your rivals could easily replicate your value proposition and there remains nothing sustainable about it.

But when you do perform unique activities to best deliver your value proposition, rivals can't easily match them because doing so will result in them no longer serving their own existing customers well. This effectively becomes the first barrier against rivals simply replicating your strategy.

Take for example Southwest, which offered a distinctive value proposition of extremely low fares compared to rivals. To accomplish this, Southwest needed to tailor its entire value chain in order to establish its superior cost structure. For example, Southwest doesn't follow the traditional hub-and-spoke model of rivals, which is necessary to enable customers to fly anywhere. Southwest instead abandoned the fly anywhere value prop and instead built out a point-to-point network. It also removed basic amenities like meals, assigned seats, baggage transfers, all in the name of faster gate turnarounds which was necessary to create its superior cost structure. This tailored value chain makes it very difficult for rivals to copy without alienating the customer base that has come to expect a lot of these traditional services that Southwest doesn't offer, thus protecting Southwest from direct imitation.

Trade-offs Different From Rivals
Trade-offs arise when strategic choices one could make are incompatible with each other. They are the proverbial fork in the road where you must choose one path over another. Product features, for example, might be incompatible: features that best meet the needs of one customer doesn't for another customer segment. Or the configuration of activities to deliver one kind of value cannot equally deliver well another kind of value. Or simply you've built a reputation or brand with a specific image and releasing a product inconsistent with that brand or reputation would hurt that image.

Robust strategies typically incorporate multiple trade-offs. It's these trade-offs that make it difficult for competitors to imitate your same strategy. But making trade-offs is hard because it requires you to say no to a certain set of customers when so many have the incorrect desire to keep their options open and attempt to serve as many customers as possible.

One of the greatest case studies on trade-offs comes from TSMC. Prior to TSMC, most semiconductors both designed and manufactured their own chips. TSMC instead made the bold decision to focus solely on being a manufacturer for other companies designs. They would not design their own chips and therefore not compete with potential customers. This made many designers of chips eager to work with TSMC and also led TSMC to build a very different value chain than its design & manufacture competitors. While we all know how successful TSMC has been with this strategy, it was this critical trade-off that set the path for their initial success and the sustainability of their strategy.

Fit Across Value Chain
Great strategies result from how well each of the activities a firm pursues align and amplify its competitive advantage. This is because activity choices are interdependent - the value or cost of one activity is often affected by the way other activities are performed. Fit amplifies the competitive advantage by lowering cost or raising customer value and price.

There are three types of fit. The first is basic consistency, where each activity is aligned with the company's value proposition and contributes incrementally to its dominant themes. The second is complementing or reinforcing fit, where real synergy is seen between activities. And finally there is substitution, where performing one activity makes it possible to eliminate another.

When you have strong fit across your value chain, it deters competition because rivals have a hard time figuring out exactly what activity they need to match because so many activities fit well together and they would have to replicate so many of your interconnected activities in order to replicate your strategy, make it far more difficult for them to do so.

Take for example, Home Depot, whose basic value proposition boils down to huge selection, everyday low prices, and knowledgeable service. The large warehouse store format they employ is essential to offering both selection and low prices. But without the third leg of the stool, excellent service, customers would have felt lost in the warehouse stores. Knowledgeable service thus fit well with the rest of Home Depot's value proposition and reinforced its other two key value proposition pillars.

Continuity Over Time
The reality is that it takes time to develop real competitive advantage, so its essential to have a consistent strategy long enough to foster the creation of competitive advantage.

Continuity of strategy helps to reinforce the company's brand, as over time customers begin to rely on the company because of the brand it has established. Continuity also fosters continuous improvement in the activities performed and improves fit across activities. Continuity also enables suppliers, channels, and other partners to bet on you, thereby improving your value proposition.

Porter believes in this day and age, organizations shift their strategy too frequently, thinking they need to in order to adjust to the latest dynamics of the market. Porter suspects though that these shifts do more harm than good as they are often following fads that do little to advance their strategy while also losing the advantages of continuity.

These five tests make up what Porter considers are the essential components of a compelling strategy. Next time you are developing a product strategy, I'd encourage you to reflect on each of these tests in order to strengthen your own strategy.

If you are interested in exploring Porter further, I'd also encourage you to read Understanding Michael Porter by Joan Magretta, which distills Porters ideas on strategy across the corpus of his published literature.