SMM 2.1

• 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.
• If strategy is to have any real meaning at all, it must link directly to your company’s financial performance. Anything short of that is just talk.
• How should you measure competitive success and superior performance? 1. Creating value for customers, 2. Dealing with rivals, 3. Using resources productively
• When Porter questions why so few companies are able to maintain successful strategies, he often points to flawed goals as the culprit: ROS (return on sales), Shareholder Value (stock price), Growth (market share)
• Return on sales (ROS) is commonly used but fails to consider invested capital, making it an inadequate measure of resource utilization.
• Growth and market share, while popular goals, also overlook the capital required for competition and can lead to unprofitable growth.
• Porter highlights the misconception that rapid growth or increased market share inherently equate to profitability, cautioning against flawed goals.
• Shareholder value, typically assessed through stock price, is noted as unreliable, yet it influences executive behavior significantly.
• Porter underscores that stock price reflects economic value accurately only over the long term, emphasizing the need for a broader perspective on shareholder value.
• Return on invested capital (ROIC) is highlighted as the key financial metric capturing effective resource utilization.
• Porter asserts that ROIC is unique in capturing the multidimensional nature of competition, including value creation for customers, rivalry management, and resource productivity.
• If you have a competitive advantage, then, your profitability will be sustainably higher than the industry average .You will be able to command a higher relative price or to operate at a lower relative cost, or both
• Differentiation, as defined by Porter, focuses on charging a higher relative price.
• The ability to command a higher price is the essence of differentiation. Differentiation is about tracking down the root causes of profitability, not just product differences.
• Cost advantage may come from lower operating costs or more efficient use of capital.
• The sequence of activities your company performs to design, produce, sell, deliver, and support its products is called the value chain.
• Every value chain is part of a larger value system: the larger set of activities involved in creating value for the end user, regardless of who performs those activities.
• The value chain is a powerful tool for disaggregating a company into its strategically relevant activities in order to focus on the sources of competitive advantage, that is, the specific activities that result in higher prices or lower costs.
• Four Essential Steps for Value Chain Examination: 1. Establish the industry's value chain, 2. Next, compare your value chain to the industry’s, 3. Identify Price Drivers, 4. Identify Cost Drivers
• The industry's value chain represents its primary business model and delineates how value is generated.
• Competitive advantage is a difference in relative price or relative costs that arises because of differences in the activities being performed. • Wherever a company has achieved competitive advantage, there must be differences in activities.