Michael Porter wrote the seminal book on strategy in the early 1980s. Called Competitive Strategy, I think it should be required for anyone starting a company. Strategy is a seemingly murky amorphous intangible concept, but Porter brilliantly prescribes the five questions strategy should answer. What are the answers for your business?
What is your distinctive value proposition? This distinctive value proposition comprises three key parts. Which customers will you serve? Which needs of those customers will you fulfill better than the competition? How will you position and price your proposition (premium/commodity)? This can be best answered by relative pricing. Amazon’s consumer value proposition is simple: the most selection at the best prices delivered fastest to all internet consumers in the US.
How do you tailor the value chain to suit your company? Porter wrote about two different types of value chains: internal value chains and external ones. In this case, he is talking about the internal one. As Joan Magretta writes in Understanding Michael Porter, “The essence of strategy and competitive advantage lies in the activities, and choosing to perform activities differently or to perform different activities from those of rivals.” This is what Porter means by tailoring the value chain to suit your company’s strategy: picking the internal activities that will differentiate it. Amazon has focused on building the single best supply chain, optimizing logistics and operations, to deliver the customer experience they value.
What trade-offs does your business offer to differentiate itself from competitors? Every strategy has a trade-off. A startup trades speed of execution through focus to win in a market. An incumbent trades greater capitalization, reach and assets for speed. In the beginning, Amazon sold only books, only online. This decision limited the total addressable market and created additional friction in the checkout process because of the shipping latency. But, Amazon traded these disadvantages for capital efficiency. Amazon did not need to open retail stores and bear those operating costs. In addition, this decision enabled Amazon to optimize their warehouses for shipping rather than retail distribution.
How strong is the value proposition across the value chain? This is a nuanced question that tries to get at the leverage the strategy creates in the business. In other words, does the new value proposition and the trade offs made within the businesses operations suddenly create new market opportunity and competitive advantage. In Amazon’s case, the answer is a resounding yes. The advantages of an online only store and the shipping focused operation system enabled the company to launch additional categories quickly. In addition, the centralized value chain absorbed fixed costs as more products were shipped through it, increasing operational efficiency, and gross margins.
How does your strategy endure over time? If market conditions change, does your strategy survive? Bezos insulated Amazon’s strategy from the fickleness of the consumer by promising them three things they would always want: more, faster, cheaper. Those three truths aren’t changing anytime soon.
These questions are not easily answered. They require a fair amount of introspection and deep thought. But the exercises well worth it to ensure that all of the time, money, energy and sweat is directed in the right place to create an enduring business.