Reinventing Strategy: the New Learning Porter Live...Winning Competitive Strategies Bangkok,...
Transcript of Reinventing Strategy: the New Learning Porter Live...Winning Competitive Strategies Bangkok,...
Copyright 2005 © Professor Michael E. Porter
Reinventing Strategy: the New Learning
Professor Michael E. PorterHarvard Business School
Winning Competitive StrategiesBangkok, Thailand
July 11, 2005This presentation draws on ideas from Professor Porter’s 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 Business Review, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means —electronic, mechanical, photocopying, recording, or otherwise—without 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.
2 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Agenda
• The Economic Foundations of Competition
• Principles of Strategy
• Developing a Strategy
• Strategy for Diversified Business Groups
3 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
How Managers Think About Competition
COMPETING TO BE THE BEST
COMPETING TO BE THE COMPETING TO BE THE BESTBEST
COMPETING TO BE UNIQUE
COMPETING TO BE COMPETING TO BE UNIQUEUNIQUE
• The worst error in strategy is to compete with rivals on the same dimensions
4 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Flawed Concepts of Strategy
• Strategy as aspiration– “Our strategy is to be #1 or #2…”
• Strategy as action– “Our strategy is to merge…”– “Internationalize…”– “Consolidate the industry…”– “Outsource…”
• Strategy as what is important– “Technology strategy, customer strategy…”
• Strategy as vision
• Strategy as learning– “Our strategy is to learn and change”
5 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Setting the Right Goals• The fundamental goal of a company is superior long-term return
on investment
• Growth is good only if superiority of ROIC is achieved and maintained
• Prevalent accounting adjustments to reported profitability can obscure true economic performance and lead to bad competitive choices
– The risks of write-offs, impairment charges, and ignoring amortization
• Profitability must be measured realistically, capturing the true profits on the full investment
• Goals and metrics besides ROIC (e.g. size; market share; revenue growth; eps growth; return on sales; ebitda margin; pro-forma earnings; cash flow) are risky for strategy
6 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Economic Performance versus Shareholder Value
Economic PerformanceEconomic Economic
PerformancePerformance Shareholder ValueShareholder ValueShareholder Value
• ROIC
• Revenue Growth
• Stock Price
• EPS
• EPS Growth
• Shareholder value is the result of creating real economic value
• Pleasing today’s shareholders is not the goal
7 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Economic Foundations of Competition Causes of Profitability
• The fundamental unit of strategic analysis is the industry- Defining the relevant industry is essential to strategy
• Company economic performance results from two distinct causes:
• Strategy must encompass both
IndustryStructureIndustryIndustryStructureStructure
Relative Position Within the
Industry
Relative Position Relative Position Within the Within the
IndustryIndustry
- Overall Rules of Competition - Sources of Competitive Advantage
8 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Economic Foundations of Competition The Basic Economics of Strategy
0%
5%
10%
15%
20%
25%
30%
Pharmacia & Upjohn* Southwest Airlines
Return on Invested Capital
1985-2002
19.55%
12.75%
Source: CompustatNote: ROIC calculated as EBIT divided by Average Invested Capital (Total Assets less Excess Cash less Current Operating Liabilities)
* Prior to 1995, reflects Pharmacia only. Company was acquired in 2000 by Monsanto, which then changed its name to Pharmacia
9 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Economic Foundations of Competition - Continued The Basic Economics of Strategy
0%
5%
10%
15%
20%
25%
30%
Pharmacia & Upjohn* Southwest Airlines
Return on Invested Capital
1985-2002
19.55%
12.75%
Source: CompustatNote: ROIC calculated as EBIT divided by Average Invested Capital (Total Assets less Excess Cash less Current Operating Liabilities)
* Prior to 1995, reflects Pharmacia only. Company was acquired in 2000 by Monsanto, which then changed its name to Pharmacia
28.14%
Industry Average
5.05%
10 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
0% 5% 10% 15% 20% 25% 30% 35%
Prepackaged Software
Pharmaceuticals
Semiconductors
Electromedical Apparatus
Groceries and Related Products - Wholesale
Restaurants
Surgical/Medical Instruments
Computer Programming & Data Processing
Homebuilding
Telephone Communications
Petroleum Refining
Motor Vehicles
Trucking
Motor Vehicle Parts & Accessory
Radio, TV Broadcast, & Comm Equipment
Hotels & Motels
Natural Gas Distribution
Catalog & Mail-Order Houses
Cable & Other Pay TV Services
Steel Works & Blast Furnaces
Airlines
Return on Invested Capital, Average of 1985 – 2002
Note: ROIC calculated as EBIT divided by Average Invested Capital (Total Assets less Excess Cash less Current Operating Liabilities)Source: Compustat and author’s calculations
Profitability of Selected U.S. Industries
Average ROIC in the U.S. Economy: 11.6%
11 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Threat of SubstituteProducts or Services
Threat of New Entrants
Rivalry AmongExisting
Competitors
Bargaining Powerof Suppliers
Bargaining Powerof Buyers
Drivers of Long-Term Industry Profitability
12 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Addressing Industry StructureBuyer Power
• Find the attractive customers– Large, “leading” customers tend to attract the most competition and
be the most demanding
• Grow alternative channels– Nurture and support alternative channels that bypass powerful
intermediaries or cultivate new customer groups
• Create end user pull– Temper the power of the immediate customer by appealing directly
to the end consumer
• Be different, not better– Strategic positioning to increase unique value to the customer
13 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Threat of SubstituteProducts or Services
Threat of New Entrants
Rivalry AmongExisting
Competitors
Bargaining Powerof Suppliers
Bargaining Powerof Buyers
Shaping Industry Structure Foodservice Distribution
• Expand value-added services• Offer private label products
• National procurement contracts
• Offer private label products
• Expand value added services
• Increase investment in sophisticated IT and national marketing
• Offer private label products
• Expand value-added services
• Offer private label products
14 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Determinants of Relative Performance
Differentiation(Higher Price)
Lower Cost
CompetitiveAdvantage
CompetitiveAdvantage
15 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Strategic Economic ModelSouthwest Airlines
0
2
4
6
8
10
12
Southwest Airline Industry Average
Cents per ASM
Note: ASM (Available Seat Miles) defined as total seats available multiplied by miles flownSource: Airline annual reports and author’s calculations
Operating Profit per Available Seat Mile
Operating Cost per Available Seat Mile
Cost Advantage:2.44
Pricing Differential:1.72
Revenue and Cost per Available Seat Mile, Average of 1998 - 2000
16 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
• When they compete in a business, companies perform a set of discrete activities, in which competitive advantage resides
Sources of Competitive AdvantageActivities and the Value Chain
SupportActivities
Marketing& Sales
(e.g. Sales Force,
Promotion, Advertising,
Proposal Writing, Web
site)
InboundLogistics
(e.g. Incoming Material
Storage, Data Collection,
Service, Customer Access)
Operations
(e.g. Assembly, Component Fabrication,
Branch Operations)
OutboundLogistics
(e.g. Order Processing,
Warehousing, Report
Preparation)
After-Sales Service
(e.g. Installation, Customer Support,
Complaint Resolution,
Repair)
M
a
rg
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
What buyers are willing to pay
17 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Marketing& Sales
(Lead generation, Model home
display, Sales force, Customer
selection of personalized
options)
Land Acquisition & Development
(Identify attractive markets, Secure
land, Procure entitlements and permits, Prepare
site)
Construction
(Design, Engineering, Schedule and
manage construction
process)
Closing
(e.g. Customer Financing,
Contract, Title, Closing)
After-Sales Service
(e.g. Warranties, Customer
Complaints)
M
a
rg
i
n
Primary Activities
SupportActivities
Firm Infrastructure(e.g. Financing, Planning, Investor Relations)
Procurement(e.g. Materials, Subcontracted Labor, Advertising, Services)
Technology Development(e.g. Product Design, Testing, Process Design, Materials Research, Market Research)
Human Resource Management(e.g. Recruiting, Training, Compensation System)
Identifying the Value Chain Homebuilding
Value
What buyers are willing to pay
18 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Commanding a Premium Price
• A premium price comes from creating buyer value (higher willingness to pay):
– Lowering the buyer’s overall cost of doing business– Allowing the buyer to enhance (non-price) value with its customers– Increasing end user satisfaction– Buyer value will vary by customer / customer group
• Buyer value is created by discrete activities a firm performs
• Buyers cannot always perceive the non-price value a firm creates
– “Signals of value” may be necessary to communicate the value created
• Creating higher value often requires extra costs
– Differentiators should only add cost where it contributes to value
Buyer Value and Financial Performance
• The division of value with the customer depends on the customer’s bargaining power
• Differentiation is profitable if the price premium exceeds the extra costs of creating it
19 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Cost Advantage
• Cost is created by performing discrete activities
• Total cost must be disaggregated to the activity level
• Cost leadership usually involves cost advantages in many activities
• The relative cost of an activity is driven by a number of cost drivers
• Cost advantage often requires spending more on some activities
• Cost advantage is enhanced by mutually reinforcing choices in several activities (fit)
• Sustained cost leadership is accompanied by a supporting culture / values
Cost and Financial Performance
• Cost advantage is profitable if it exceeds any price discount offered to secure adequate volume
– Scale– Cumulative experience– Timing of asset
purchase– Institutional factors (e.g.
regulation, unionization)
– Fit (linkages with other activities)
– Sharing across businesses
– Policy choices
– Pattern of capacity utilization
– Integration vs. outsourcing
– Location of the activity
20 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Agenda
• The Economic Foundations of Competition
• Principles of Strategy
• Developing a Strategy
• Strategy for Diversified Business Groups
21 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
• Creating a unique and sustainable competitive position
• Assimilating, attaining, and extending best practices
OperationalOperationalEffectivenessEffectiveness
StrategicStrategicPositioningPositioning
Run the same race faster Choose to run a different race
Achieving Superior PerformanceOperational Effectiveness is Not Strategy
22 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Five Tests of a Good StrategyOverview
• A unique value propositioncompared to competitors
• A different, tailored value chain
• Clear tradeoffs, and choosing what not to do
• Activities that fit together and reinforce each other
• Continuity of position with continual improvement in realizing it
• A unique value propositioncompared to competitors
• A different, tailored value chain
• Clear tradeoffs, and choosing what not to do
• Activities that fit together and reinforce each other
• Continuity of position with continual improvement in realizing it
23 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Strategic PositioningEnterprise Rent-A-Car
• Home-city replacement cars to drivers whose cars are being repaired or who need an extra vehicle, at low rates (30% below airport rates)
• Numerous, small, inexpensive offices, including on-premises offices at major accounts
• Open during daylight hours
• Delivers cars to customers’ homes or rental sites, or customers to cars
• Acquire new and older cars, favoring soon-to-be discontinued older models
• Keep cars six months longer than other major rental companies
• In-house reservations
• Grassroots marketing with limited television
• Cultivate strong relationships with auto dealerships, body shops, and insurance adjusters
• Hire extroverted college graduates to encourage community interaction and customer service
• Employ a highly sophisticated computer network to track its fleet
Value PropositionValue PropositionValue Proposition DistinctiveActivities
DistinctiveDistinctiveActivitiesActivities
24 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Defining the Value Proposition
What Relative Price?
What Relative What Relative Price?Price?
What Customers?
What What Customers?Customers?
Which Needs?Which Which
Needs?Needs?
• What end users?
• What channels?
• Which products?
• Which features?
• Which services?
25 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
• Superior-engineered, high performance, sporty, customized automobiles at a premium price
• “Active driving” design philosophy
• Highly unique product and engine performance
• Centralized engineering
• Design department with high degree of autonomy to encourage creativity
• Factories configured for customization
• High craft labor input in production with selective automation
• High vertical integration to achieve proprietary components
• One global brand
• Limited dealer system
• Non-traditional, brand-focused marketing
• BMW-sponsored race team
Strategic PositioningBMW
Value PropositionValue PropositionValue Proposition Distinctive Activities
Distinctive Distinctive ActivitiesActivities
Source: Draws on research conducted by Harvard Business School students M. Collardin, F. Cueto, J. Encinar, A. Gonzalez, A. Kulyk, and D. Smith, April 1997
26 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Creating Supply and Demand Curves Universal Stainless
Price B
Price A
Strategy A
Strategy B
MarginPrice,Cost
Volume
27 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Recent Thinking on the Sustainability of Competitive Advantage
• “There are no sustainable competitive advantages anymore”
• “Any strategy can be imitated”
• “There are no sustainable competitive advantages anymore”
• “Any strategy can be imitated”
28 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Making Strategic Tradeoffs
• Tradeoffs occur when strategic positions are incompatible
– the need for choice
Sources of Tradeoffs
– Incompatible product / service features or attributes
– Differences in the best configuration of activities in the value chain to deliver the chosen value proposition
– Inconsistencies in image or reputation across positions
– Limits on internal coordination, measurement, motivation, and control
• Tradeoffs make a strategy sustainable against imitation by established rivals
• An essential part of strategy is choosing what not to do
29 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Strategic TradeoffsNeutrogena Soap (1990)
• Forgo cleaning, skin softening, and deodorizing features
• Choose higher costs through the configuration of:
– packaging
– manufacturing
– detailing
– medical advertising
– skin research
• Give up the ability to reach customers via:
– promotions
– television
– some distribution channels
30 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Value Proposition
• Predominately male, experienced customers and contractors
• Building material, home improvement, and lawn & garden products
Set of Activities
• No-frills, warehouse design
- Merchandise stored in large racks and stacked on the floor
• All customers (including contractors) serviced out of same stores
• Bulk deliveries of products directly from vendors usually during the day
• Every-day low prices with volume discounts
Value Proposition
• Female shoppers and casual do-it-yourselfers
• Extensive home decor, appliance, kitchen, and lawn & garden offerings
Set of Activities
• Appealing store layout- Wider aisles, brighter lighting, lower ceilings
- “Stores-in-the-store” featuring fully-equipped kitchen & bath studios, lighting displays, etc.
• Contractors serviced by separate corporate division with different yards
• Hub-and-spoke distribution with just-in-time delivery usually after hours
• Every-day low prices without volume discounts
Strategic TradeoffsUS Home Improvement Industry
Lowe’sLoweLowe’’ssHome DepotHome DepotHome Depot
31 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Evolution of Customer Management Thinking
• Be close to your customer
• Customer intimacy
• Customer retention
• Customer relationship management
• Delight your customer
32 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Recent Thinking on the Sources of Competitive Advantage
• “Key” Success Factors
• “Core” Competencies
• “Critical” Resources
• “Key” Success Factors
• “Core” Competencies
• “Critical” Resources
• Competitive advantage is seen as concentrated in a few parts of the value chain
33 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Southwest Airlines Mutually Reinforcing Activities
Limited Passenger
Service
Short-haul, point-to-point routes
between medium-sized cities and
secondary airports
Very Low Ticket Prices
Lean, Highly Productive
Ground and Gate Crews
Frequent, Reliable
Departures
High Aircraft
Utilization
15-Minute Gate Turns
Automatic Ticketing Machines
Standardized fleet of 737
aircraft
Limited use of travel agents
Flexible union
contracts
High employee
stock ownership
No seat assignments
No mealsNo
baggage transfers
No connections with other
airlines
“Southwest, the low-fare
airline”
34 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Mutually Reinforcing Activities Zara
Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS
Very Very flexible flexible
production production systemsystem
Tight coordination
with 20 wholly-owned
factories
Extensive use of
store sales data
JIT delivery
Very Very frequent frequent product product changeschanges
CuttingCutting--edge fashion edge fashion at moderate at moderate
price and price and qualityquality
WordWord--ofof--mouth mouth
marketing marketing and repeat and repeat
buyingbuying
Little media advertising
Widely popular styles
Prime store Prime store locations in locations in high traffic high traffic
areasareas
Customers chic but
cost-conscious
Advanced production machinery
Global team of trend-
spotters
Production in Europe
• Fit is about leveraging what is different to be more different
35 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
• Question“What is it about the direct sales model and mass customization that has been difficult for competitors to replicate?”
• Answer “It’s not as simple as just having a direct sales force. It’s not as simple as just having mass customization in plant or manufacturing methodology. It’s awhole series of things in the value chain from the way we procure, the way we develop product, the way we order and have inventory levels, and manufacturer and service support. The entire value chain has to work together to make it efficient and effective.”
Kevin Rollins, Vice Chairman
Why Are Good Strategies Not Imitated? Dell
Source: Forbes ASAP, April 5, 1999
36 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Continuity of Strategy
• Continuity of strategy is fundamental to sustainable competitive advantage– e.g., allowing an organization to understand the strategy– building truly unique skills and assets related to the strategy– establishing a clear identity with customers, channels, and other outside entities– strengthening fit across the value chain
• Reinvention and frequent shifts in direction are costly and confuse the customer, the industry, and the organization
• Continuity is essential to the company’s basic value proposition, but successful companies continuously improve in how they realize their strategy
– Strategic continuity and continuous change should occur simultaneously. They are not inconsistent
• Continuity of strategy allows learning and change to be faster and more effective
37 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
• Fast food chicken tailored to the tastes and preferences of the Central American customer at very low prices
• Fast food chicken tailored to the tastes and preferences of the Central American customer at very low prices
• Combination of traditional fast food model with some table service
• Heavy marketing and promotion – “An affordable treat for the whole family”– Frequent gimmicks and promotions,
targeting every member of the family– Strong civic pride and social awareness
• Engineering department studies motion to improve restaurant efficiency
• Emphasize high productivity in the labor force through incentives, education, and training
• Combination of traditional fast food model with some table service
• Heavy marketing and promotion – “An affordable treat for the whole family”– Frequent gimmicks and promotions,
targeting every member of the family– Strong civic pride and social awareness
• Engineering department studies motion to improve restaurant efficiency
• Emphasize high productivity in the labor force through incentives, education, and training
Strategic Positioning in Emerging EconomiesPollo Campero, Guatemala
Value PropositionValue PropositionValue Proposition Set of Activities
Set of Set of ActivitiesActivities
Source: Draws on research conducted by Harvard Business School students M. Collardin, F. Cueto, J. Encinar, A. Gonzalez, A. Kulyk, and D. Smith, April 1997
• The low price expands the market• Pollo Campero competes effectively against US fast food
companies through better understanding of local customer needs
•• The low price expands the marketThe low price expands the market•• Pollo Campero competes effectively against US fast food Pollo Campero competes effectively against US fast food
companies through better understanding of local customer needscompanies through better understanding of local customer needs
38 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
• Imitating the offerings of foreign and other domestic competitors
• Price as the primary basis of competition
• Wide product lines that serve all local customer segments
Typical Strategic Errors in Emerging Economies
39 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Barriers to Strategy
Flawed Concepts
• Misunderstanding of strategy itself
Industry Pressures
• Industry conventional wisdom leads all companies to follow common practices
• Labor agreements limit ways of configuring activities
• Regulation constrains price, product, service or process alternatives
• Customers ask for incompatible features or request new products or services that do not fit the strategy
40 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Barriers to Strategy
Capital Market Biases• Strong pressures to emulate the currently “successful” peers• Growth expectations are rewarded at the expense of sustained profitability• There is a strong bias to “do deals” (M&A)
Internal Practices• Inappropriate goals and performance metrics• Rapid turnover of leadership encourages compromises of the strategy to
achieve short-term performance benefits• Inappropriate cost allocation is used to justify adding new products, services,
or customers• Pursuit of generic best practices (e.g. IT systems) standardizes processes and
makes them less distinctive• Outsourcing makes activities homogenous and blurs distinctiveness• Risk aversion and over-decentralization work against clear tradeoffs• A desire for consensus leads to blurring instead of clear strategic choices• Over-weighting of equity-based compensation amplifies unhealthy stock
market pressures
41 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Barriers to StrategyNeutrogena Soap (2005)
• Prior to the 1990’s Neutrogena was the number one brand recommended by dermatologists
• Neutrogena had a relatively narrow target market but deep penetration and high customer loyalty
• Beginning in the early- to mid-1990’s, new growth-oriented management shifted Neutrogena from a dermatologist-focused marketing concept to mass market television advertisements and celebrity endorsements
• Neutrogena lost market share while Gallderma’s Cetaphil captured the loyalty of dermatologists, and prospered
Source: Draws on research conducted at the Institute for Strategy and Competitiveness and interviews conducted with a former Neutrogena executive.
42 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Agenda
• The Economic Foundations of Competition
• Principles of Strategy
• Developing a Strategy
• Strategy for Diversified Business Groups
43 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Strategy for What?Defining the Right Business: Products
Product A Product C
Product E
Product B
Product D
Marketing& Sales
(e.g. Sales Force,
Promotion, Advertisin
g, Proposal Writing,
Web site)
InboundLogistics
(e.g. Incoming Material Storage,
Data Collection,
Service, Customer Access)
Operations
(e.g. Assembly, Component Fabrication
, Branch Operations
)
OutboundLogistics
(e.g. Order Processing,
Warehousing, Report
Preparation)
After-Sales Service
(e.g. Installation, Customer Support,
Complaint Resolution,
Repair)
M
a
rg
i
n
Primary Activities
SupportActivities
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
What buyers are willing to pay
Threat of SubstituteProducts or
Services
Threat of New Entrants
Rivalry AmongExisting
Competitors
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
44 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
• Customers are independent restaurants and institutions
• The product line consists of well over 10,000 SKUs
• Sales and service activities are carried out by local sales reps
• Value-added services, credit terms, and distributors’ private-label products are valued and allow support product/service differentiation
• Logistical activities are heavily local in nature (local warehouses and trucks)
Defining the Right BusinessFoodservice Distribution
Broadline DistributionBroadline Distribution Systems Distribution
• Customers are national chains
• The product line consists of several hundred SKUs
• Customer relationships and services are specified by national contracts
• Price is the key basis for selection; customers do not purchase value-added services or private-label products
• A national distribution and warehousing network is required
45 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Strategy for What?Defining the Right Business: Geography
GlobalGlobalGlobalNationalNationalNationalLocalLocalLocal RegionalRegionalRegional
SupportActivities
Marketing& Sales
(e.g. Sales Force,
Promotion, Advertising,
Proposal Writing, Web
site)
InboundLogistics
(e.g. Incoming Material
Storage, Data Collection,
Service, Customer Access)
Operations
(e.g. Assembly, Component Fabrication,
Branch Operations)
OutboundLogistics
(e.g. Order Processing,
Warehousing, Report
Preparation)
After-Sales Service
(e.g. Installation, Customer Support,
Complaint Resolution,
Repair)
M
a
rg
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
What buyers are willing to pay
• Separate local value chains
• Integrated global value chain
Ability to Leverage Key Activities Across Geography
Cross-NationalCrossCross--
NationalNational
46 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Revealing a Strategy
• History– Understand the unique position that the company may have
occupied in the past
– Can it be updated with new technology and delivery mechanisms?
• Results– Measure sales by customer type / product type– Understand product line / customer profitability
– What is the strategy that explains the areas of superior profitability?
47 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Creating a Strategy
Unique Activities• Building off activities with true
uniqueness• Looking for new activity
configurations and combinations
• Migrate toward the chosen strategic position• Focus incremental investments on reinforcing the chosen position
Strategic Segmentation• Creatively segmenting product
varieties, customer groups, and purchase occasions
Tradeoffs• Finding tradeoffs in the value
proposition or in the value chain
Industry Dynamics• Identifying strategic positions opened
up by industry changes
48 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Customer Group• “Preferred”, lowest risk drivers
Set of Activities• Direct customer interaction through direct mail,
telephone, and the Internet• Sophisticated direct mail targeting low risk
households• 35+ year database and modeling utilities on
preferred drivers• Complex rating and pricing system• Heavy advertising to drive requests for rate
quotes (“I’ve got good news.”)• Quote rates to only 50% of customers who
inquire about coverage • 15-20% lower prices than competition• Network of insurance adjusters with cell phones
working out of own vehicles for immediate response
• 24-hour customer service to handle sales, policy inquires, and claims
• Conservative, liquid investment portfolio
Customer Group• High-risk drivers shunned by standard
automobile insurers
Set of Activities• Distribution through independent agents• Sales force that educates independent agents in
complex information gathering techniques• 30-year database on high-risk drivers• Complex rating scheme• 14,000 different prices• 50-300% premium pricing over standard
segment• Adjusters work from offices on wheels to provide
immediate response. Adjusters trained and empowered to write out check at scene of accident
• Steep incentives to make a 4% underwriting profit
• Conservative, liquid investment portfolio
Segmentation and Strategic PositioningAutomobile Insurance
ProgressiveProgressiveProgressive GeicoGeicoGeico
49 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Segmentation and Strategic PositioningEnterprise Rent-A-Car
• Home-city replacement cars to drivers whose cars are being repaired or who need an extra vehicle, at low rental rates (30% below airport rates)
• Ubiquitous, small, inexpensive offices, including on-premises offices at major accounts
• Open during daylight hours
• Delivers cars to customers’ homes or rental sites, or customers to cars
• Acquire new and older cars, favoring soon-to-be discontinued older models
• Keep cars six months longer than other major rental companies
• In-house reservations
• Grassroots marketing with limited television
• Cultivate strong relationships with auto dealerships, body shops, and insurance adjusters
• Hire extroverted college graduates to encourage community interaction and customer service
• Employ a highly sophisticated computer network to track its fleet
Value PropositionValue PropositionValue Proposition DistinctiveActivities
DistinctiveDistinctiveActivitiesActivities
50 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Growing Strategically1. Make the strategy even more distinctive
- Introduce new technologies, features, products or services that are tailored to the strategy and which leverage other distinctive activities within the value chain
2. Deepen the strategic position rather than broaden it– Raise the penetration of chosen customers / needs
3. Expand geographically to tap new regions or countries using the same positioning
– Aggressively reposition foreign acquisitions around the company’s strategy
4. Expand the market for what the company can uniquely deliver– Find other customers and segments that would most value the strategy
• It is an illusion that growth (and especially profitability) are easier to achieve in untapped or growth segments
• It is difficult, and often dangerous, to try to grow faster than the underlying market for an extended period.
• Industry leaders should concentrate as much, or more, on growing the category as on growing share
• In many cases, the appropriate goal is to earn a high return and pay dividends
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Internationalization Strategy from Developing CountriesGeneral Principles
• Internationalize first in product lines or customer segments where the company has the most unique advantages
- The most important advantages will come from distinctive products, processes, and services
- Some product advantages may come from tailoring to lower income, developing country, or regional needs
- Labor costs or resource advantages are rarely sustainable
• Gain direct access to foreign markets as soon as practical rather than rely solely on intermediaries
52 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
• Prioritize markets to enter- Similar needs and segments
- Expatriates - e.g., Zee TV with Indian programming; Pollo Campero in fast food
- Over time, learn from sophisticated and demanding foreign customers
• Use alliances selectively - Use alliances as transitional strategies, not as permanent solutions
- Ensure that alliances do not block the company’s ability to gain competitive advantage and damage its own capabilities
• Locate manufacturing facilities from a regional perspective - Consolidate operations for greater efficiency and scale
• Source inputs from the lowest cost locations, not only the home country
Internationalization Strategy from Developing CountriesGeneral Principles - continued
53 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Cemex Strategy• The market leader in Mexico with 60% of the country’s total installed capacity• Produces commodity products as well as products tailored to the Mexican market• Aggressive investments in process technology and IT
Internationalization Concept• Acquire controlling stakes in the largest producers in emerging countries • Target investments would have plants located close to ports to allow opportunities for
exporting excess capacity• Migrate products and technologies from Mexico to new countries
Country Selection• Country should have large population, high population growth, and relatively low level of
current consumption • Cemex should be able to control at least 25% of the market• There are other potentially attractive countries for Cemex in the region
Company Selection• Cemex could obtain a controlling stake • Potential for restructuring the target company and its local industry
Internationalization Strategy from Developing CountriesCEMEX
54 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
The Process of Developing a Strategy
• Strategy should be developed and periodically reviewed in a formalprocess rather than being left to occur spontaneously
– The process need not be highly structured
• Strategy development is best done in a multifunctional team including the general manager and heads of important functions
• The role of strategic planning executive or department is to serve as staffto the team, not the entity responsible for strategy
• The strategy team itself should be relatively small to ensure frank and productive discussion among the leader and senior peers
– Strategy development involves tradeoffs and the exploration of options which can be misunderstood or unsettling if a large group is involved
– Other managers can be invited for particular meetings / topics
• The strategy team should conduct its work jointly rather than delegating components of the strategy to functional areas
55 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Communicating a Strategy• Strategy involves everyone in an organization, not just management
• The benefits of strategy are greatest when it is communicated widely in the organization
• The basic strategy and value proposition must also be communicated to customers, channels, suppliers, and financial markets
– What about confidentiality?
• Managers should not assume that subordinates understand the strategy or that they agree with it
– A series of open, two way discussions is necessary to increase understanding and buy-in
• Individuals who do not ultimately accept the strategy cannot have an ongoing role in the company
56 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Measuring a StrategyLevels of Metrics
Profitability(Relative ROIC, Growth)
Strategic Economics(Relative price, relative cost)
Value Proposition
Activity Distinctiveness
Operational/Best Practice Metrics
(e.g. Relative performance levels of distinct activities (e.g. relative quality, service, and cost at the activity
level)
(e.g. Penetration rate of chosen customers, satisfaction measures of chosen needs, relative product performance along chosen attributes)
57 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
The Role of Leaders in Strategy
• Clearly distinguish operational effectiveness from strategy
• Lead the process of choosing the company’s unique position– The choice of strategy cannot be entirely democratic
• Communicate the strategy relentlessly to all constituencies
• Maintain discipline around the strategy, in the face of many distractions.
• Decide which industry changes, technologies, and customer needs to respond to, and how the response can be tailored to the company’s strategy
• Measure progress against the strategy using metrics that capture the implications of the strategy on multiple levels
• Sell the strategy and how to measure progress to financial markets
• Commitment to strategy is tested every day
58 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Strategy
What Is a Strategy? What is Not a Strategy?
• Best practice improvement• Execution• Aspirations• A vision• Learning• Agility• Flexibility• Innovation• The Internet (or any technology)• Downsizing• Restructuring• Mergers / Consolidation• Alliances / Partnering• Outsourcing
• Best practice improvement• Execution• Aspirations• A vision• Learning• Agility• Flexibility• Innovation• The Internet (or any technology)• Downsizing• Restructuring• Mergers / Consolidation• Alliances / Partnering• Outsourcing
• A unique value propositionversus competitors
• A different, tailored value chain
• Clear tradeoffs, and choosing what not to do
• Activities that fit together and reinforce each other
• Continuity of position with continual improvement in realizing it
• A unique value propositionversus competitors
• A different, tailored value chain
• Clear tradeoffs, and choosing what not to do
• Activities that fit together and reinforce each other
• Continuity of position with continual improvement in realizing it
59 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Agenda
• The Economic Foundations of Competition
• Principles of Strategy
• Developing a Strategy
• Strategy for Diversified Business Groups
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Corporate DiversificationLevels of Strategy
• The overall strategy of a diversified firm
– What mix of businesses should the company be in?
– How should the strategies of distinct business units be integrated and managed at the group / corporate level?
• The foundation of corporate strategy is competitive strategy
– Favorable industry structure
– Operational effectiveness
– A sound business unit strategy
Group and Corporate Strategy
Group and Group and Corporate Corporate StrategyStrategy
• How to compete in a distinct business or industryBusiness Strategy
Business Business StrategyStrategy
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Relative Performance of Diversified vs. Focused Firms
Pure Diversified
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Mar
ket
to B
oo
k R
atio
Year
Hybrid
Focused
Source: Michael Raynor (2000), Real Organization for Real Options: The Limits of Established Corporate Contingency Theory and the Sources of Corporate Value Added in Hybrid Diversifiers . Doctoral Dissertation, Harvard Business School.
62 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
ResortHotels
Motion Picture
Distribution
DirectMarketing
RetailStores
Mickey’sKitchen*
CruiseLine
The Walt Disney CompanyCorporate Strategy
TelevisionProgram-
ming DisneyChannel
FamilyMotionPictures
AnimatedFeature Films
ConsumerProducts
DisneyRecords
SportsTeam
Multi-media
Productions
Broadway Productions
Acquired Through Cap Cities / ABC Merger
Traveling Shows
Note: * Discontinued
YouthBooks andEducational
Materials
ThemeParks
•Shared characters•Shared brand•Shared family values•Cross-promotions
Miramax
HollywoodPictures
TouchstoneReal
EstateDevelop-
ment
TimeSharing
RadioStations
Television Stations
Broadway Theater
TelevisionNetwork
AdultCable
ChannelsHollywoodRecords
HyperionBooks
DiscoverMagazine
AdultPublishing / Newspapers
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Ma
rg
in
M
arg
in
Creating Corporate Value Added
• Ongoing corporate competitive advantage depends heavily on interrelationships across the value chains of business units
– Transfer proprietary knowledge and skills in performing activities– Share activities across businesses
64 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Organizing for SynergyThe Walt Disney Company
Corporate Management
• Internal development of most new businesses
• Disney name on everything• Divest where culture is inconsistent• Retain marginal units if great leverage
to the whole company• Activist corporate management
Human Resource Management
• Disney University• Norms and values reinforced in
many ways
Organizational Structure
• Three large units• Many horizontal mechanisms• Imagineering as a separate unit
Systems
• Transfer prices but intervention by top management
• Promotion usually from within• Discretionary bonus• Significant stock options
65 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Typical Business Group in an Emerging Economy
CarDealership
CarDealership
FinancialServices
FinancialServices
SugarSugarSugar
AirlineAirline
HotelHotelHotel
Real EstateServices
Real EstateReal EstateServicesServices
ComputerWholesalerComputerComputer
WholesalerWholesaler
GroceryStores
GroceryGroceryStoresStores
Fast FoodFranchisesFast FoodFast FoodFranchisesFranchises
IndustrialParts
IndustrialParts
Imports/ DistributionImports/ Imports/
DistributionDistributionFood
ProcessingFoodFood
ProcessingProcessing
TobaccoTobacco
TextilesTextilesTextiles
• What is the corporate value added?
66 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Why Business Groups Are So Common in Emerging Economies
• Exploit market inefficiencies and institutional weaknesses
– Financial markets
– Labor markets
– Input markets (components, support services, licensing of technologies, etc.)
• Wield greater political power
• Reduce risks in an unstable environment
67 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Migrating Corporate Strategy in Emerging Economies
• The conglomerate group becomes less and less viable as an economy becomes more open and more competitive
– Wider access to capital and foreign partners
– More competition
– Better access to suppliers and outside institutions
– Greater need for true competitive advantages
– Limited ability to remain competitive in disparate businesses
• A heavy role in the economy for large business groups is associated statistically with lower GDP per capita
• Business groups must become more focused if they are to continue prospering
– Limit the array of businesses with a clear theme
– Grow by expanding core businesses regionally and globally rather than seeking to compete in a wide array of unrelated areas
68 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt
Re-focusing a Conglomerate in an Emerging Economy Empresas CAP, Chile
Source: Draws on research conducted by Professor Tarun Khanna at the Harvard Business School
Empresas CAP• Mining• Steel• Forestry• Fruits• Other Farm Products• Petroleum• Pension Management• Television Network• Life Insurance
CAP• Mining and Steel
TERRANOVA• Forestry
INVERCAP• Other businesses
Changes in the Chilean Business Environment• Liberalization of trade• Institutional equity investment increases dramatically• American Depositary Receipts became a viable financing
mechanism for Chilean firms• Surge of national and international analysts who cover the
Chilean market
1990 1994