On Competition

This updated and expanded collection brings together the full range of frameworks developed by Michael E. Porter, a Harvard Business School professor widely regarded as a leading authority on competitive strategy, to analyze competition and value creation across companies, nations, and social organizations. The book's 15 chapters, drawn from articles spanning nearly three decades, are organized into five parts: core strategic concepts, the competitiveness of locations, competitive solutions to societal problems, strategy and philanthropy, and strategy and leadership. Porter's central argument is that competition is a pervasive force for improvement and that every organization needs a strategy to deliver superior value.

Part I lays the analytical foundation. In Chapter 1, Porter presents the five competitive forces that determine an industry's long-run profitability: the threat of new entrants, supplier bargaining power, buyer bargaining power, the threat of substitutes, and rivalry among existing competitors. He argues that industry structure, not surface features like growth rate or technology, drives profitability, and warns that managers define competition too narrowly by focusing only on direct rivals. Three strategic implications follow: companies should position themselves where forces are weakest, exploit shifts in industry structure, and work to reshape the forces in their favor. Chapter 2 draws a sharp distinction between operational effectiveness and strategy. While performing similar activities better than rivals is necessary, best practices diffuse rapidly and lead to competitive convergence. Strategy means deliberately choosing a different set of activities to deliver a unique mix of value. Southwest Airlines illustrates this through short-haul, low-cost, point-to-point service, while Ikea does so through self-service retailing for young buyers. A sustainable position requires trade-offs, because activities designed for one approach are incompatible with another, and fit among activities, where interlocking elements create a system far more difficult to imitate than any single part.

Chapters 3 and 4 apply these frameworks to information technology and the Internet. Writing with Victor E. Millar, Porter introduces the value chain, a model that disaggregates a company into primary activities (such as operations and marketing) and support activities (such as procurement and technology development). He argues that information technology transforms every activity and the linkages among them, altering industry structure, creating competitive advantage, and spawning new businesses. In the Internet chapter, Porter challenges the belief that the Internet changes everything, showing that it tends to weaken industry profitability by reducing entry barriers, intensifying rivalry, and empowering buyers, while making operational advantages easier to imitate. Rather than rendering strategy obsolete, the Internet makes strategic positioning more essential. Porter profiles Edward Jones, a brokerage firm that uses the Internet internally but declines to offer online trading because doing so would undermine the firm's strategy of personalized, conservative advice.

Chapter 5 examines corporate strategy for diversified companies. Porter reports findings showing that large U.S. companies divested more than half their acquisitions in new industries over the 1950 to 1986 period. He proposes three tests any diversification must pass: structural attractiveness, a cost of entry that does not consume all future profits, and a competitive advantage gained from the connection. Among four concepts of corporate strategy, sharing activities across business units, such as common distribution systems, offers the most powerful basis for diversification. Porter uses Marriott to illustrate both sides: sharing activities succeeded in food service and hospitality, while transferring skills failed in gourmet restaurants and theme parks despite surface similarities.

Part II addresses why location remains critical. Chapter 6 introduces the diamond model of national competitive advantage, drawing on a four-year study of ten trading nations. Porter argues that prosperity is created through innovation and productivity, not inherited through natural endowments. The diamond comprises four attributes: factor conditions (especially specialized factors like skilled labor and research institutions), demand conditions (sophisticated home-market customers), related and supporting industries, and firm strategy, structure, and rivalry. Porter contends that vigorous domestic rivalry is the single most important determinant. The Italian ceramic tile industry centered in Sassuolo illustrates all four elements interacting as a self-reinforcing system. Chapter 7 extends this analysis to clusters, defined as geographic concentrations of interconnected companies, specialized suppliers, and supporting institutions. Using detailed diagrams of the Italian leather footwear and California wine clusters, Porter argues that clusters raise productivity, spur innovation, and stimulate new business formation. He distinguishes cluster development from industrial policy, advocating that governments build on existing concentrations rather than target favored industries. A case study of microclusters in Catalonia, Spain, illustrates a successful cluster initiative that improved government-business dialogue and led to specific cluster-enhancing investments. Chapter 8 synthesizes location and global networks, identifying two dimensions of global strategy: configuration (where to locate activities) and coordination (how to manage dispersed activities). Case studies of Novo Nordisk, a Danish insulin and enzyme producer, Hewlett-Packard, and Honda show that each company concentrates its most strategically important activities at a home base while dispersing less critical ones.

Part III applies competitive frameworks to societal problems. Chapter 9, co-authored with Claas van der Linde, challenges the view that environmental protection and competitiveness are inherently opposed. Porter argues that pollution often represents economic waste and that well-designed regulations trigger innovations improving resource productivity. Case studies across six industries show that innovation offsets can minimize or eliminate compliance costs. Chapter 10 proposes an economic model for revitalizing inner cities based on genuine competitive advantages: strategic location, underserved local demand, integration with regional clusters, and an available labor pool. The private sector takes the leading role, while government shifts from direct intervention to removing obstacles and improving the business environment. Chapter 11, co-authored with Elizabeth Olmsted Teisberg, diagnoses U.S. health care as suffering from competition at the wrong level. Rather than competing at the level of health plans and hospital networks, providers should compete on outcomes for individual diseases and conditions, where high-volume specialists achieve better results at lower costs. Porter and Teisberg envision positive-sum competition featuring unrestricted patient choice, transparent pricing, and mandatory dissemination of risk-adjusted outcome data.

Part IV turns to philanthropy and corporate social responsibility. Chapters 12 and 13, both co-authored with Mark R. Kramer, argue that foundations and corporations alike must move beyond diffuse giving to strategic approaches that create disproportionate social value. Foundations can ascend a hierarchy of impact from selecting the best grantees to advancing the state of knowledge, as the Ford and Rockefeller Foundations did with green revolution research that doubled and tripled crop output per acre. Corporations can use philanthropy to improve their competitive context: Cisco's Networking Academy, which trains network administrators in 147 countries, addressed a workforce shortage constraining the company's growth while generating significant social benefit. Chapter 14, also with Kramer, introduces the principle of shared value, arguing that business decisions and social policies must benefit both sides. Companies should map how their value chain activities affect communities and how social conditions affect their competitiveness, then pursue strategic initiatives whose social and business benefits are large and distinctive. Toyota's Prius hybrid, Microsoft's community college partnerships, and Nestlé's work with small farmers in India each illustrate this integration.

Part V consists of Chapter 15, co-authored with Jay W. Lorsch and Nitin Nohria, which identifies seven surprises awaiting new chief executives. Drawing on Harvard's New CEO Workshop, the authors find that CEOs cannot run companies directly, that giving orders is costly, that reliable information is hard to obtain, that every action sends amplified signals, that the board of directors holds ultimate authority, that pleasing shareholders is not the right goal, and that leaders remain human with limits. The CEO's true role is to manage organizational context through strategy, processes, values, and tone, earning and maintaining the moral mandate to lead.