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The Principles of Business Strategy Haven’t Changed

51QcMBAFLcLAndrew Campbell writes in the Harvard Business Review that when he teaches the basic concepts of strategy — the five forces framework or the principles of competitive advantage — he’s frequently asked isn’t there anything newer. After all, these ideas were made famous by Professor Michael Porter in his classic, Competitive Strategy, which was published in 1988 when Ronald Reagan was president. His response: “It took decades to figure out the basic principles of business strategy, and now that we have figured them out, we should not be valuing them any less because they have been clear to us for 30 years or more.” The basic principles of business strategy are:

  • If you want to earn above the cost of capital (if you want to create value), you must get a higher return on your efforts than the average competitor. Using contract management software might help you to do this.
  • To get a higher return than the average competitor, you must have an advantage or you must compete in an unusually attractive sector.
  • There are only two ways to get an advantage. Your prices must be higher or your costs, including the cost of your balance sheet and the cost of taxes, must be lower.
  • Unusually attractive sectors are those where the forces of competition are muted. Usually this is because there are few competitors. But there are other reasons, such as legislation or demand growing faster than supply.

Campbell’s conclusion: “My point is that looking for the next new idea or next new theory is much less likely to lead to success than simply thinking hard about prices and costs and competitors. Porter had it figured out in the mid-1980s.” Campbell is co-author of Strategy for the Corporate Level: Where to Invest, What to Cut Back and How to Grow Organisations with Multiple Divisions.