20091017 Turkey Strategic Thinking

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1 Copyright 2009 Professor Michael E. Porter20091017 Turkcell (Strategy).ppt

Professor Michael E. Porter

Harvard Business School

Istanbul, Turkey

October 17, 2009This presentation draws on ideas from Professor Porters books and articles, in particular, Competitive Strategy(The Free Press, 1980); Competitive

Advantage (The Free Press, 1985); What is Strategy? (Harvard Business Review, Nov/Dec 1996); Strategy and the Internet (Harvard BusinessReview, March 2001) and On Competition (Harvard Business Review, 2008). No part of this publication may be reproduced, stored in a retrieval system,

or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Michael E.Porter. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: Oct 14, 2009

Strategic Thinking: Implications for TurkishCompanies


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Strategic Thinking

COMPETING TO BE THEBEST

COMPETING TO BE THECOMPETING TO BE THE

BESTBESTCOMPETING TO BE

UNIQUE

COMPETING TO BECOMPETING TO BE

UNIQUEUNIQUE

The worst error in strategy is to compete with rivals on the samedimensions


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Flawed Concepts of Strategy

Strategy as action Our strategy is to merge internationalize consolidate the industry double our R&D budget

Strategy as aspiration Our strategy is to be #1 or #2 Our strategy is to grow at Our strategy is to provide superior returns to our shareholders

Strategy as vision Our strategy is to best understand and satisfy our customers needs to advance technology for mankind

Strategy defines the companys distinctive approach to competingand the competitive advantages on which it will be based


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Setting the Right Goals

Strategic thinking starts with setting proper financial goals for thecompany

The fundamental goal of a company is superior long-term returnon investment

Growth is good only if superiority in ROIC is achieved andsustained

ROIC threshold

Setting unrealistic profitability orgrowth targets can undermine

strategy


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Shareholder Value Is Not The Goal

Superior EconomicPerformance

Superior EconomicSuperior EconomicPerformancePerformance Shareholder ValueShareholder ValueShareholder Value

Sustained ROIC andGrowth

Stock Price

Shareholder value is the result of creating real economic value

Pleasing todays shareholders is not the goal


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The companys overall mix of businesses andthe integration ofbusiness unit strategies

Levels of Strategy

Competitive orBusiness Strategy

Competitive orCompetitive or

Business StrategyBusiness Strategy

How to compete in each distinct business orindustry

Corporate or Portfolio StrategyCorporate or Portfolio StrategyCorporate or Portfolio Strategy


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Economic Fundamentals of Competition

Industry

Structure

IndustryIndustry

StructureStructure

Relative Position

Within theIndustry

Relative PositionRelative Position

Within theWithin the

IndustryIndustry

- Overall Rules of Competition - Sources of Competitive Advantage

The unit of strategic analysis is the industry

Defining the relevant industry is essential to sound strategy

Company economic performance results from two distinct causes

Strategic thinking must encompass both


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Disaggregating Economic Performance:Industry vs. Position

0%

5%

10%

15%

20%

25%

30%

35%

Revlon Paccar

Return onInvestedCapital

1993-2007

13.6%

31.6%

27.8%

Industry Average

10.5%

Note: Excess cash is calculated by subtracting cash in excess of 10% of annual revenue.

Source: Compustat (2008), authors analysis

ROIC = Earnings before

interest and taxes

divided by invested

capital less excess cash


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Bargaining Powerof Suppliers

Understanding Industry Structure

Threat of SubstituteProducts or Services

Threat of NewEntrants

Rivalry Among

ExistingCompetitors

Bargaining Powerof Buyers


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Redefining Industry Competition

Zero SumCompetitionZero SumZero SumCompetitionCompetition Positive SumCompetition

Positive SumPositive SumCompetitionCompetition

Compete head to head One companys gain

requires other companies

loss

Competition underminesindustry value

Compete on strategy More than one

company can be

successful

Competition expandsthe value pool


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Positioning and Industry Structure

Large independent

suppliers of engines

and drive train

components

Unionized labor

Bargaining Powerof Suppliers

Bargaining PowerBargaining Power

of Suppliersof Suppliers

Rivalry AmongExisting

Competitors

Rivalry AmongExisting

Competitors



Threat of NewEntrants

Threat of NewThreat of New

EntrantsEntrants

Threat of SubstituteProducts or

Services

Threat of SubstituteThreat of Substitute

Products orProducts or

ServicesServices

Many truck producers

are assemblers

Heavy price

competition on

standardized models

Large fleets

Leasing companies

Small fleets and owneroperators

Railroads

Water transportation

Heavy Trucks


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Paccar Strategic Positioning

Focus on owner-operators

Design trucks with special features and amenities

Customization and build-to-order

Design for low truck operating costs

Offer extensive roadside assistance to truckers

Premium price

Different customers / different basis of competing


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Strategic Positioning

Economic Fundamentals

Differentiation

(Higher Price)

Lower Cost

CompetitiveAdvantage

Competitive

Advantage


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Competing in a business involves performing a set of discreteactivities, in which competitive advantage resides

Strategy is reflected in how activities in the value chain areconfigured and linked together

Foundations of Competitive AdvantageThe Value Chain

SupportActivities

Marketing& Sales

(e.g. SalesForce,

Promotion,Advertising,

ProposalWriting, Web

site)

InboundLogistics

(e.g. IncomingMaterial

Storage, DataCollection,

Service,CustomerAccess)

Operations

(e.g. Assembly,ComponentFabrication,

BranchOperations)

OutboundLogistics

(e.g. OrderProcessing,

Warehousing,Report

Preparation)

After-SalesService

(e.g. Installation,CustomerSupport,

ComplaintResolution,

Repair)

M

a

r

g

i

n

Primary Activities

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Procurement(e.g. Components, Machinery, Advertising, Services)

Technology Development(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

Human Resource Management(e.g. Recruiting, Training, Compensation System)

Value

Whatbuyers arewilling topay


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Creating a uniquecompetitive position

Assimilating, attaining, andextending best practices

OperationalOperational

EffectivenessEffectiveness

StrategicStrategic

PositioningPositioning

Achieving Superior PerformanceOperational Effectiveness is Not Strategy

Do the same thing better Do things differently to meetdifferent needs


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Five Tests of an Excellent Strategy

A unique value proposition

A different, tailored value chain

Clear tradeoffs, and choosingwhat not to do

Activities in the value chain thatfit together and reinforceeach other

Strategic continuity withcontinual improvement inrealization



Clear tradeoffs, and choosingwhat not to do

Activities in the value chain thatfit together and reinforceeach other

Strategic continuity withcontinual improvement inrealization


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Strategic PositioningIKEA, Sweden

Young, first time, or price-sensitive buyers

Stylish, space efficient and scalable furnitureand accessories at very low price points.

Modular, ready-to-assemble, easy to packagedesigns

In-house design of all products Wide range of styles displayed in huge

warehouse stores with large on-site inventories

Self-selection Extensive customer information in the form of

catalogs, explanatory ticketing, do-it-yourselfvideos, and assembly instructions

Ikea designer names attached to relatedproducts to inform coordinated purchases

Long hours of operation Suburban locations with large parking lots

On-site, low-cost, restaurants Child care provided in the store Self-delivery by most customers

DistinctiveActivities

DistinctiveDistinctive

ActivitiesActivitiesValue PropositionValue PropositionValue Proposition


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Five Tests of an Excellent Strategy



Clear tradeoffs, and choosing what

not to do

Activities in the value chain that fittogether and reinforce eachother

Strategic continuity with continual

improvement in realization


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Product Higher priced, fully assembled products

Customization of fabrics, colors, finishes,and sizes

Design driven by image, materials, varieties

Value Chain

Source some or all lines from outsidesuppliers

Medium sized showrooms with limited

models on display

Limited inventories / order with lead time

Extensive sales assistance

Traditional retail hours

Strategic TradeoffsIKEA, Sweden

Product Low-priced, modular, ready-to-assemble

designs

No custom options

Furniture design driven by cost,

manufacturing simplicity, and style

Value Chain

Centralized, in-house design of all products

All styles on display in huge warehouse stores

Large on-site inventories Limited sales help, but extensive customer

information Long hours of operation

IKEAIKEAIKEA Typical Furniture RetailerTypical Furniture RetailerTypical Furniture Retailer


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Integrating the Value ChainZara Apparel

Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS

Wide

range of

styles

CustomersCustomerschic butchic but

costcost--

consciousconscious

Strategic fit comes from leveraging what is different to be more different

Tight

coordination

with 20

wholly-owned

factories

JIT delivery

Little media

advertising

WordWord--ofof--

mouthmouthmarketingmarketing

and repeatand repeat

buyingbuying

Global

team oftrend-

spotters

Advanced

production

machinery

CuttingCutting--

edge fashionedge fashion

at moderateat moderate

price andprice and

qualityquality

Prime storePrime store

locations inlocations in

high traffichigh traffic

areasareas

Extensive

use of

store sales

data

Majority of

production

in Europe

VeryVery

flexibleflexible

productionproduction

systemsystem

VeryVery

frequentfrequent

productproduct

changeschanges


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Growing Strategically

1. Make the strategy even more distinctive

2. Deepen the strategic position with target customers (rather thanbroaden it)

3. Expand geographically to tap new regions or countries usingthe same positioning

4. Expand the market for what the company can uniquely deliver

It is an illusion that growth in new, unserved segments isprofitable

It is dangerous to attempt to grow faster than the underlyingmarket for an extended period.

Industry leaders should concentrate as much, or more, ongrowing the industry as on growing market share


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Emerging CountryBusiness Groups

CarDealership

Car

Dealership

FinancialServices

FinancialServices

SugarSugarSugar

AirlineAirline

HotelHotelHotel

Real EstateServices

Real EstateReal Estate

ServicesServices

ComputerWholesaler

ComputerComputer

WholesalerWholesaler

Grocery

Stores

GroceryGrocery

StoresStores

Fast FoodFranchises

Fast FoodFast Food

FranchisesFranchises

IndustrialParts

Industrial

Parts

Imports/Distribution

Imports/Imports/

DistributionDistributionFood

Processing

FoodFood

ProcessingProcessing

TobaccoTobacco

TextilesTextilesTextiles

Miramax

Hollywood

Pictures

RadioStations

ResortHotels

Real

EstateDevelop-

ment

TelevisionProgram-

ming DisneyChannel

MotionPicture

Distribution

Family

MotionPictures

AnimatedFeature Films

DirectMarketing

Retail

Stores

Consumer

ProductsDisneyRecords

SportsTeam Multi-

media

Productions

BroadwayProductions

BroadwayTheater

Hollywood

Records

TelevisionNetwork

Adult

CableChannels

Traveling

Shows

Televisi

on

Stations

TimeSharing

Touchstone

YouthBooks andEducational

Materials

Hyperion

BooksDiscoverMagazine

Mickeys

Kitchen*

CruiseLine

Theme

Parks

AdultPublishing /

Newspapers

Diversified Companies inAdvanced Economies

Walt Disney

Diversification in an Emerging Economy


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Strategic Thinking at Turkish Companies

Low Price

Share of Market

Product / Product

Innovation

Export Uniform Products

Large Business Groups

Superior Value

Unique Position

Customer Experience

Total Customer Support

Locally-Tailored Regional

and Global Strategy

Integrated Multi-Business

Companies


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Obstacles to Strategic Thinking

Misunderstanding of strategy principles

Industry conventional wisdom leads all companies tofollow common practices

Customers ask for incompatible features or request newproducts or services that do not fit the strategy

Inappropriate goals and performance metrics bias strategychoices

A desire forconsensus blurs strategic tradeoffs

Short term pressure to please shareholders


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The Role of Leaders in Strategy

Commitment to strategy is tested every day

Drive operational improvement, but clearly distinguish it from strategy

Lead the process of choosing the companys unique position The CEO is the chief strategist The choice of strategy cannot be entirely democratic

Communicate the strategy relentlessly to all constituencies Harness the moral purpose of strategy

Maintain discipline around the strategy, in the face of many distractions.

Decide which industry changes, technologies, and customer needs torespond to, and how the response can be tailored to the companys strategy

Measure progress against the strategy using metrics that capture theimplications of the strategy for serving customers and performing particularactivities

Sell the strategy and how to evaluate progress against the strategy to thefinancial markets

20091017 Turkey Strategic Thinking

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