The Art of Strategy.

01 · The Question

What is strategy?

Michael Porter, in his 1996 HBR essay "What Is Strategy?", argued that operational effectiveness is not strategy. Doing the same things better than rivals is necessary; it is not sufficient. Eventually competitors converge on the same best practices, and the industry's profit pool drains.

Strategy, for Porter, is the deliberate choice of a different set of activities to deliver a unique mix of value. Southwest Airlines doesn't try to be a slightly cheaper American Airlines. It chose point-to-point flying, single aircraft type, no meals, no seat assignment, fast turnaround. Each piece reinforces the others. Imitating one element is useless; imitating all of them is, in practice, impossible without abandoning the rival's existing model.

The essence of strategy, Porter wrote, is choosing what not to do.

"The essence of strategy is choosing to perform activities differently than rivals do." — Michael E. Porter, HBR 1996

02 · The Five Forces

Porter's industry analysis

Published in 1979, refined for decades. The five forces determine the long-run profitability available to participants in an industry. Strong forces compress margins; weak forces enable durable returns.

Some industries are structurally attractive. Pharma at patent-protected scale ran 25%+ ROIC for decades. U.S. airlines, by contrast, have lost more money cumulatively than they've made — high rivalry, powerful labor (suppliers), substitutes (Zoom), and price-conscious buyers all converge.

03 · The Three Generic Strategies

How to win

Porter's 1980 trilemma: a firm must choose cost leadership, differentiation, or focus. Trying to do all three results in being "stuck in the middle" — not cheap enough for cost-buyers, not special enough for premium-buyers.

"Stuck in the middle is almost a guarantee of low profitability." — Michael E. Porter, Competitive Strategy, 1980

04 · The Value Chain

Where the profit lives

Porter (1985) decomposes the firm into five primary activities (inbound logistics, operations, outbound logistics, marketing & sales, service) and four supporting activities (procurement, technology, HR, infrastructure). Each is a candidate site of competitive advantage.

05 · BCG and Ansoff

Two old workhorses

06 · Disruption

Christensen's innovator's dilemma

Clayton Christensen's 1997 book examined why successful incumbents — disk drives, steel, retail — repeatedly lost to seemingly inferior new entrants. The answer was unsettling: these incumbents lost because they were well-managed, not despite it.

Disruption begins at the low end (or in a new market) where the entrant's product is "good enough" for under-served or non-customers. Incumbent profitability sits at the high end of the market. Customers there don't want the new product; it lacks features. So the incumbent rationally ignores the low end.

The disruptor improves on its own trajectory. Eventually it reaches mainstream "good enough" — and the incumbent finds itself defending only the smallest, highest-end segment, with a cost structure built for the whole market.

Examples

• Disk drives. 8" → 5.25" → 3.5" → 2.5" → SSD. Each transition killed the incumbent leader. Six waves; only IBM survived all of them, and barely.
• Mini mills vs. integrated steel. Started in rebar (no one wanted to compete on rebar). Moved up. By 2000, owned everything but the highest-grade automotive sheet.
• Toyota in U.S. autos. Started with the Corolla — small, cheap, "for poor people." Detroit ceded the segment. Twenty years later, Toyota was selling Lexus to Cadillac's customers.

"Companies fail because they listen too much to their best customers." — Clayton Christensen, The Innovator's Dilemma

07 · Blue Ocean

Kim & Mauborgne · create the market

W. Chan Kim and Renée Mauborgne, 2005. The metaphor: most strategy is "red ocean" — fighting in existing market space, where competition has bled the water. The alternative is to create new market space — uncontested — by reconstructing buyer value.

The mechanism: the four actions framework. For any industry, ask:

• Eliminate — which factors that the industry takes for granted should be eliminated entirely?
• Reduce — which should be reduced well below industry standard?
• Raise — which should be raised well above?
• Create — which factors should be created that the industry has never offered?

Cirque du Soleil

Eliminated: animals, star performers, multiple show rings. Reduced: fun, thrill, danger. Raised: unique venue, artistic music & dance. Created: theme, refined environment, multiple productions. Result: an entirely new market between circus and theatre, charging Broadway prices and growing where the circus industry was contracting.

08 · Jobs to be Done

What is the milkshake for?

Theodore Levitt's 1960 line: "People don't want a quarter-inch drill. They want a quarter-inch hole." Christensen developed the idea into jobs to be done theory: customers "hire" products to make progress on a job in their life, in their context.

09 · Resource-Based

VRIO · what's actually defensible

Jay Barney's 1991 framework. A resource (or capability) yields sustained competitive advantage only if it is:

• Valuable — exploits opportunities or neutralizes threats
• Rare — not widely held by competitors
• Inimitable — costly or impossible for rivals to replicate
• Organized — the firm is set up to exploit it

A merely valuable but common resource (skilled labor in tech) yields competitive parity. Valuable + rare yields temporary advantage. Add inimitable, and the advantage is durable. Add organized, and it actually gets captured as profit.

Apple's design culture, Berkshire's capital allocation, Toyota's production system, Pixar's story-development process — all VRIO-positive. Each took decades to build and would take decades to replicate.

10 · Case

Apple's wedge into mobile

January 9, 2007. Steve Jobs onstage at Macworld: "Today, Apple is going to reinvent the phone." A widescreen iPod, a phone, and a breakthrough internet communicator. "These are not three separate devices. This is one device."

By every Five Forces measure, the phone industry was hostile. Carriers held distribution. Nokia and Motorola owned hardware. RIM owned enterprise. Margins were ~10–15%.

Apple's strategy did three unusual things at once:

Vertical integration. Owned chips (eventually), OS, hardware, retail, content (iTunes, App Store). The chain was designed for one product, not licensed.

Differentiation, not cost. Started ~$500 unsubsidized — 2× competitors. Premium pricing by design.

Captured the carrier rents. AT&T exclusivity in exchange for revenue share — Apple, not the carrier, owned the customer.

By 2024, Apple captured ~85% of global smartphone profits with ~20% of unit share. The most successful new-product wedge in business history.

11 · Case

Nokia · the cliff

In 2007, Nokia made 51% of the world's smartphones, ran the most profitable handset business of all time, and held a market cap of $150B+. By 2013 it sold its devices business to Microsoft for $7.2B. By 2016 the brand had to be relicensed.

"We poured gasoline on our own burning platform." — Stephen Elop, Nokia CEO, internal memo, 2011

12 · Reading

What to read & watch