Michael E. Porter’s Competitive Strategy

As research for the next book I’m supposed to be writing, I’ve been reading Michael E. Porter‘s book Competitive Strategy. It’s a brilliant book and it is considered the standard text on the subject, read by freshly hatched management consultants worldwide. But it’s drier than school cafeteria chicken, and every time I read two pages, I have to take a nap.

It’s worth it, so I’ve been taking a lot of naps lately. I’m only on page 57. 

One thing the book emphasizes is that you should analyze your competition and try to guess how they will react to your move. Here’s one question to ask yourself:

Are there any regulatory, antitrust, or other governmental or social constraints on the behavior of the firm that will affect such things as its reaction to moves of a smaller competitor or the probability that it will try to gain a larger market share? Has the competitor had any antitrust problems in the past? … Has it entered into any consent decrees? Such restraints or even just a history may sensitize a firm so that it foregoes reacting to strategic events unless some essential element [of] its business is threatened. The firm attempting to capture a small share of a market from an industry leader can enjoy some protection as a result of such constraints, for example. [page 53]

Of course, antitrust reminds me of Microsoft. Microsoft has always acted, against all credibility, as if it didn’t do anything remotely wrong — pundits ask “how can Microsoft executives be the only ones in the world who are so delusional about the legality their anticompetitive behavior?” Microsoft’s strategy has been to proclaim their innocence repeatedly; to continue to compete aggressively in all areas, and to merrily do new things, such as requiring Passport accounts for everything, which are bound to get them into anti-trust trouble yet again. Why?

If you’ve been working in the software industry, you’ve probably seen zillions of good new product ideas quashed by some executive who asks, “what if Microsoft enters this space and makes all the profits go away?” Lemming VCs generally have a policy of automatically saying “no” to any investment that could be seen as competing with Microsoft or which might prod Microsoft to create a new product in response. This herd fear of Microsoft in the software industry is enormously beneficial to Bill … lots of potential competition never gets off the ground because of fear that Microsoft will squash it.

This benefit would be lost if Microsoft acted even slightly concerned about the Justice Department. Put 2 and 2 together: if Microsoft were to act contrite and concede even the slightest point in the Justice Department’s anti-trust case, hundreds of independent software companies and VCs would see this as their opportunity to enter Microsoft’s markets and try to get a small piece of market share, knowing that Microsoft would be sensitized against appearing to be monopolistic and therefore might allow smaller competitors to survive. Bill Gates remembers working with IBM on OS/2 in the late 1980s, when it was completely impossible to get anything accomplished at IBM. Microsoft has an institutional memory of how ineffectual that company was against competitors: everything IBM did had to be reviewed by internal consent decree committees to make sure it wasn’t monopolistic, and it was no problem for young companies (like, um, Microsoft) to take big bites out of IBM’s ankles without provoking a reaction.

Seen in that context, Microsoft’s squashing of Netscape could well have been intended as a stern warning across the bow of Kleiner Perkins to stay the hell out of their garden; as much as Marc Andreessen’s childish threats to replace Windows was threatening, it was even more threatening that John Doerr seemed to have lost the fear of Microsoft that is vital to Microsoft’s dominance of the software industry.

It only makes sense to read Porter after you’ve spent a few years reading the business press; every sentence will remind you of dozens of examples you’ve seen across other industries and the whole thing will make sense. That’s the other reason this book takes me so long to read (besides the obligatory naps caused by it’s soporific nature): every sentence makes me look up at the ceiling, say “Ah-ha!” and rethink some aspect of how the software industry works in a new light.

About the author.

In 2000 I co-founded Fog Creek Software, where we created lots of cool things like the FogBugz bug tracker, Trello, and Glitch. I also worked with Jeff Atwood to create Stack Overflow and served as CEO of Stack Overflow from 2010-2019. Today I serve as the chairman of the board for Stack Overflow, Glitch, and HASH.