Quotes from Joan Magretta

The essence of strategy," Porter often says, "is choosing what not to do.

In 1970, for example, Walmart was barely a blip on anyone's radar. Today, as the world's most powerful buyer, it is the dominant force in industry after industry. In what must be one of the most honest job titles I've ever seen, the company's chief buyer is called "vice president for international purchase leverage.

For Porter, competitive advantage is not about trouncing rivals, it's about creating superior value. Moreover, the term is both concrete and specific. If you have a real competitive advantage, it means that compared with rivals, you operate at a lower cost, command a premium price, or both.

Performance, Porter argues, must be defined in terms that reflect the economic purpose every organization shares: to produce goods or services whose value exceeds the sum of the costs of all the inputs. In other words, organizations are supposed to use resources effectively. The financial measure that best captures this idea is return on invested capital (ROIC).

Growth is another widely embraced goal, along with its sister goal, market share. Like ROS, these fail to account for the capital required to compete in the industry. Too often companies pursue unprofitable growth that never leads to superior return on capital. As Porter notes wryly when he talks to managers, most companies could instantly achieve rapid growth simply by cutting their prices in half.

Porter's solution to this problem requires some courage: the only way to know if you are achieving the ultimate goal of creating economic value is to be brutally honest about the true profits you've earned and all the capital you've committed to the business. Strategy, then, must start not only with the right goal, but also with a commitment to measure performance accurately and honestly.

In insurance, for example, USAA has been a stellar performer with a value proposition aimed at low-risk customers. Here's what is essential: finding a unique way to serve your chosen segment profitably.

Just to keep our terminology straight, for Porter strategy always means "competitive strategy" within a business. The business unit, and not the company overall, is the core level of strategy. Corporate strategy refers to the business logic of a multiple-business company.

The Enterprise value proposition is based on a simple insight: renting a car meets different needs at different times. Hertz and its followers in the industry built their business around travelers, people away from home on business or on vacation. Enterprise recognized that a sizeable minority of rentals, roughly 40 to 45 percent, occur in the renter's home city. If your car is stolen, for example, or damaged in an accident, you'll need a rental.

Very early in his career, he went after the single biggest and most consequential question in business: Why are some companies more profitable than others? One big question led to another.

A company can sustain a premium price only if it offers something that is both unique and valuable to its customers. Apple's hot, must-have gadgets have commanded premium prices. Ditto for the high-speed Madrid-to-Barcelona train and the trucks Paccar creates for owner-operators. Create more buyer value and you raise what economists call willingness to pay (WTP), the mechanism that makes it possible for a company to charge a higher price relative to rival offerings.

Only by competing to be unique can an organization achieve sustained, superior performance.

In the oft-told joke, one economist says to another, "Sure, it works in reality. But will it work in theory?" Porter's work endures—and is so widely cited and used—because it works in both realms, theory and practice.

I start with competition in Part 1 for the simple reason that if there were no competition, there would be no need for strategy. Competitive rivalry is a relentless process working against a company's ability to find and maintain an advantage.

Good strategies depend on the connection among many things, on making interdependent choices.

It takes time to develop real competitive advantage, to understand the value you create, to achieve tailoring, trade-offs, and fit. If you grasp the role of continuity in strategy, it will change your thinking about change itself. Paradoxically, continuity of strategy improves an organization's ability to adapt and to innovate.

Strategy explains how an organization, faced with competition, will achieve superior performance.

The key to competitive success—for businesses and nonprofits alike—lies in an organization's ability to create unique value.

Porter starts with the industry because competing to be unique is a choice made against a specific and relevant set of rivals, and because the structure of the industry determines how the value it creates is shared.

Your cost advantage might come from lower operating costs or from using capital more efficiently (including working capital), or both.

A strategic positioning, especially when it has a high degree of focus, is sometimes seen as carving out a "niche." The implication of that word is that the market opportunity is small. Although this may sometimes be the case, even focused competitors can be very large. In the case of Southwest, what initially looked like a narrow niche has revolutionized the airline industry.

Strategy explains how an organization, faced with competition, will achieve superior performance. The definition is deceptively simple.

a good competitive strategy that will result in sustainably superior performance.

In business, multiple winners can thrive and coexist. Competition focuses more on meeting customer needs than on demolishing rivals. Just look around. Because there are so many needs to serve, there are many ways to win.