By Fred Nickols

If we, as performance improvement professionals, want to be taken seriously by our clients, we have to understand their world and we have to speak their language, whether it is marketing, finance, strategy, operations, HR, or legal. One of the “languages” spoken in many for-profit organizations is that of “competitive strategy” with a distinct Michael Porter accent. You do not have to be an expert in competitive strategy but, chances are, the subject will crop up from time to time, especially if you are working on performance at the organizational level. At the very least you need to be conversant in the basics. The two main areas to be examined here are (1) Porter’s five forces and (2) Porter’s three strategies.

First, the five forces.

The diagram  below is based on one that appears on page 4 of Michael Porter’s 1980 book, Competitive Strategy . It indicates five factors or forces that drive competition in an industry. Four factors surround the fifth, which is the intensity of the rivalry between and among competitors.

Industry-analysis-porter

These five factors or forces influence decisions related to the choice of competitive strategy on which a company will rely. The table  below sets forth the three basic strategies laid out by Porter: cost leadership, differentiation, and focus.

CompetitiveStrategy Required Skills andResources OrganizationalElements Associated Risks
Overall Cost Leadership Sustained capital investment and access to capitalProcess engineering skills 

Intensive supervision of labor

 

Products designed for ease of manufacture

 

Low-cost distribution system

 

Tight cost controlFrequent, detailed reports 

Structured organization and responsibilities

 

Incentives based on meeting strict quantitative targets

Technological change nullifies past investments or learning.Low-cost learning by industry newcomers or followers is through imitation, or through their ability to invest in state-of-the-art facilities. 

There is an inability to see required product or marketing change because of the attention placed on cost.

Inflation in costs narrows the firm’s ability to maintain enough of a price differential to offset competitors’ brand images or other approaches to differentiation.

Differentiation Strong marketing abilitiesProduct engineering with creative flair 

Strong capability in basic research

 

Corporate reputation for quality or technological leadership

 

Long tradition in the industry or unique combination of skills drawn from other businesses

 

Strong cooperation from channels

Strong coordination among functions in R&D, product development, and marketingSubjective measurement and incentives instead of quantitative measures 

Amenities to attract highly skilled labor, scientists, or creative people

The cost differential between low-cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services, or image possessed by the differentiated firm for large cost savings.Buyers’ need for the differentiating factor falls. This can occur as buyers become more sophisticated.Imitation narrows perceived differentiation, a common occurrence as industries mature.
Focus Combination of the above policies directed at the particular strategic target Combination of the above policies directed at the particular strategic target The cost differential between broad-range competitors and the focused firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus.The differences in desired products or services between the strategic target and the market as a whole narrows. 

Competitors find submarkets within the strategic target and out-focus the focuser.

 

It is worth noting that some of us are in the business of performance improvement, which is to say Michael Porter’s ideas apply to us as well as to our clients. If that applies to you, it is probably worth your while to spend some time poring over the summaries of Porter’s work laid out above and think about how they apply to your business. As just a few considerations, think about the ease with which someone can set up a performance improvement practice. What are the barriers to market entry on that score? What are the switching costs for your clients to shift from you to another practitioner or performance improvement firm? Are there just a few practitioners out there in your space or are there many? What does that say about your bargaining power as a supplier? What are the substitute products or services with which you must compete? Do this kind of thoughtful analysis for your own practice or business. You might think about it in relation to ISPI as well. After all, it is your Society.

Oh, and if you are “an employee” and think that these notions do not apply to you, you are wrong. You are a business of one and very much in competition for continued employment and a paycheck. So think about those competitive strategies and the basis of your competition. Are you competing on the basis of cost (i.e., are you basically “cheap labor”)? Or do you have some clear-cut way of differentiating yourself from the rest of the employee population? If so, what kind of a job are you doing of marketing yourself and your distinct services? Perhaps your basis of competition is focus and, if so, on what do you focus? Processes? People? Training? Financial impact?

Think about it.

About the Author
Fred Nickols is the managing partner of Distance Consulting LLC. Fred is a retired Navy man, writer, consultant, and former executive with a deep and abiding interest in human behavior and performance in the workplace, including the learning that makes it possible and that leads to improvement. He has published more than 100 articles; paid blog posts; and book chapters in a wide variety of professional journals, books and magazines. They are available free on his articles’ website at www.skullworks.com. Fred can be reached via email at fred@nickols.us.

Note: More of Fred Nickol’s articles regarding knowledge workers can be found on his website in a section titled “The Knowledge Worker’s Tool Room”; www.nickols.us/toolroom.html.