8/4/2019 Semana 1 - Strategy is About Competitive Advantage

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TIMES BUSINESS | MANAGING SPECIALTHE TIMES OF INDIA, MUMBAI *

19TUESDAY, MAY 6, 2008

THE MICHAEL PORTER INTERVIEW—1

Q.Do you think that in today’s worldthe discipline of strategy is gettingits due place?

A. There is a widespread accept-ance that strategy is a fundamen-tal discipline of management,thatmost organizations need a strate-gy. Most boards insist on being in-volved in making strategy. Theprinciple of strategy is finally get-ting its place.

Twenty years ago, some people

thought that strategy was a fad, thatstrategic planning was a waste of time. The acceptance of the impor-tance (of strategy) is universal.Now the constraint is re-

ally about understanding how tothink about and develop a strategy.

But there is a lot of confusionabout what strategy really is, andhow to define it—a lot of confusionbetween strategy and operationaleffectiveness.That is one of the mostimportant distinctions in all of man-agement. You have to distinguishbetween pursuing practices that aregood for every company and pur-suing a position that is unique toyour particular organization.There

is also much confusion about thedifference between a strategy and

a vision,or a strategy and a mis-sion statement. While

everyone thinksstrategy is important,then, there is much room

for improvement in actual practice.

Q. What specific problems do yousee in companies?

A. A common example wouldbe a company that confusesoutsourcing with strate gy.They outsource many serv-

ices to India, and call thisa strategy. But outsourc-ing is actually about be-ing operationally effec-tive or reducing costs.Strategy is about creat-ing a unique position interms of overall cost ordifferentiation.The trou-

ble with outsourcing isthat the more you out-source,the harder it is to

have a unique strategy,because everyone else can

outsource too. Misunder-standing strategy, compa-

nies pursue steps in this caseoutsourcing that actually

makes it harder to achievestrategic uniqueness.Similarly, a merger is not a

strategy.A merger is a step that maymove you towards a unique posi-tion, to have a strategy. Managersconfuse doing deals with having astrategy. Strategy is about compet-itive advantage, about how a com-pany serves customers differentlyfrom competitors. A merger maycontribute to a strategy, but a dealin itself is not a strategy. A strate-

gy has to do with a company’s fun-damental positioning in the

marketplace.

Q. Do these miscon-ceptions bother

you?

A. I

don’t like to see companies fail,andresources not put to good use. It isbetter for consumers that compa-nies have strategies. The more com-panies have strategies, the more con-sumers have unique choices. If everyone made the same car withthe same features,customers wouldbe worse off. So having a strategyis socially beneficial.

A lot of people don’t understandthis. They want all companies tocompete on price, and look for thevendor who gives them the cheap-est product.This is not good for cus-tomers, who should really want aproduct that delivers them the bestoverall value. And society wantschoice and to encourage innovation.Strategy is all about innovation— innovation not necessarily in tech-

nology but in the way a companycompetes.

Many managers have a zero-sumview of competition. They thinkthere is only one ideal way to com-

pete, and the challenge is to be thefirst to get there. My work stressesthat there are many different waysto compete, many different ways todeliver value to customers, andmany different customer needs.Strategy is fundamentally about de-ciding what you are going to be asan organization while also adopt-ing best practices.

Q. The five forces framework is al-most three decades old. Today thereis a lot of emphasis on knowledge-intensive industries that operate un-der a different set of realities. Inmany industries like pharma or IT,economies of scale seem to matterless than smart ideas do. Sometimesexisting competition doesn’t mat-

ter; rather, competition comesfrom across industry bound-

aries. Does the five forcesframework need to changein this new environment?

A. My article “How

Competitive ForcesShape Strategy’’ was

published in the Har-vard Business Reviewin 1979.This past Jan-uary, a new article ti-tled “The Five Com-petitive Forces ThatShape Strategy’’ap-peared in HBR. Itr einfo rc es, up -dates,and extendsthe original work.Among other

things, there are new examplesand a box in the text focusing onhow to conduct industry analysisin practice.

That having been said, the fiveforces framework is meant to be in-dependent of time. At any point inhistory, the same five forces are atwork. These forces are innate tocompetition itself.Every industryis different, of course, with differ-ent economic characteristics, dif-ferent customer characteristics.But

the five forces are common: Theyprovide a tool for looking at the dy-namics of any industry. Economiesof scale don’t matter in some in-dustries, but they do matter in mostindustries. Although they may mat-ter less in some Internet companies,look at Amazon or eBay whereeconomies of scale are extremelyimportant to success.

The five forces framework doesnot say that there is one kind of industry competition;it says there

are many kinds of industry com-petition, but every industry is gov-erned by this underlying set of principles.

While much has changed, the

changes don’t have to do with thefive forces. They have to do withparticular technologies or the char-acteristics of particular industries.I wrote an article titled “Strategyand the Internet’’ (Harvard Busi-ness Review, March 2001) whichshows why so many smart peoplemade so many mistakes in thatspace. They thought the Internetwas something different, ratherthan seeing the Internet as an en-abling technology that had to ad-dress the same underlying princi-ples of competition.

Looking at trends, I would saythat the geographic scope of in-dustries has widened. More andmore industries are truly interna-tional, with competition occurringacross many countries. That’s be-cause needs have become more sim-ilar and the underlying cost of co-ordination and logistics has beendramatically reduced. So it is be-coming easier to shift goods, easi-

er to exchange information, easierfor people to travel, easier to out-

source services via the Internet,and so on.

Another trend is vertical disin-tegration. Instead of a car manu-facturer making its parts or run-ning its data center,now other firmstake on many functions in the val-ue chain. We now increasingly havefirms that specialize in certain partsof the value chain, and differentparts of the value chain are mov-ing to different locations.

‘Strategy is about competitive advantage’ Michael Eugene Porter is arguably the best known name in the world of competitive strategy. The Bishop William Lawrence University Professor at Harvard Business School, Porter’s work traverses a huge expanse: from competitive strategy and the dynamics of how nations compete, tohealthcare. He is the author of seminal books such as ‘Competitive Strategy’, ‘Competitive Advantage’ and ‘The Competitive Advantage of Nations’. In a rare interview with TOI’s Neelim

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, Porter talks about his ideas in today’s new world. The first part of this interview focuses onhis work on strategy, while Part 2 (to appear in next week’s edition) will talk about Porter’s ideas about the competitiveness of nations.

MASTER MIND

Michael Porter enjoys a Colossus-like reputation in the world of management. We asked some of his contemporaries and peerswhat they thought of him. Here’swhat they had to say:

P

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,Professor, MIT Sloan School of Management and author of ‘The Fifth Discipline’ and ‘The Dance of 

Change’.

“When someone like MichaelPorter tells companies thatsustainability and related socialand environmental issues willaffect the future of thecompany’s competitiveness,people listen. He has had similarimpact on countries as part of hispioneer work on thecompetitiveness of nations. Manyhave lauded Porter’s pioneeringefforts and strategy, but Ipersonally believe his connectingto the larger social andenvironmental well-being uponwhich all companies and nationsultimately depend, will prove tobe one of his most enduringcontributions.”

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oz, The Timken Chaired Professor of Global Technology and Innovation Professor of Business Policy,

INSEAD, and author of ‘The Multinational Mission’ and ‘From 

Global to Metanational’.

“Initially, Porter essentially tookmicro economics knowledge of structural analysis of industriesand made it accessible tomanagers. That was a veryimportant contribution for apractical purpose. The discussionon the idea of clusters is notexactly a new argument. But allthe management academics whobecome very well known, are tosome extent, popularisers of discipline-based theories. I think

the contribution is veryimportant because it came at theright time when there wasliberalization of the globaleconomy and of investments,and the opening of markets.”

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,Robert P Bauman Professor of Strategic 

Leadership,London Business School, and 

author of ‘Fast Second’ and ‘Strategic Thinking for the Next Economy’.

“Professor Porter has been, andstill is, the most influential globalthinker on Strategy. Hiscontributions are numerous andas relevant today as when he firstdeveloped them. The Five Forces

framework, for instance, is a toolthat people can use to analyzetheir industries. A tool has novalue on its own it’s how we useit that gives it value. But the toolcannot be blamed for anything!”

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,Professor of International Business, Tuck School of Business at Dartmouth 

College, and author of ‘Ten Rules for Strategic Innovators’.

“There is only one criterion bywhich business schools should be judged. That is: are we advancingscholarship that have a profoundimpact on significantmanagement problems? I cannotthink of a better academic thanMichael Porter who fits thiscriterion 100%. His seminalcontributions—industry structureand five forces, value chainanalysis, the notion of competitive advantage— havefundamentally changed theconversation among strategyscholars and strategypractitioners. Porter’s workcontinues to have an importantimpact on what strategyacademics research and howleaders in organizationsformulate strategy.”

Do

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,Chief Executive,New Paradigm and author of ‘Wikinomics’. In 

an article in Strategy+Business magazine,Tapscott had famously contested Porter’s views on the Internet and strategy 

“Michael Porter’s stature as thepreeminent business strategist inthe world is unassailable. Heinvented the theory of competitive advantage andcontinues to innovate insights aseach year goes by.”

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,Charles H Kellstadt Professor of Marketing at Emory University’s Goizueta School of 

Business, and author of ‘The Rule of Three’.

“Michael Porter’s bestcontribution was broadening the

definition of competition with theFive Forces. It was a seminalpiece of work. The Five Forcesframework is very good but Ithink his framework on strategyis weak this whole thing aboutdifferentiation, low cost positionor focus. Because every companyhas to differentiate some way orthe other. Differentiation and lowcost are blended strategies.Differentiation alone is not astrategy.”

THE IMPACT OF HIS IDEAS

Five Forces: This framework helps oneanalyse the attractiveness of an industry. Thepremise is that the intensity of competition isbased on five forces, namely, rivalry amongstexisting competitors, threat of new entrants,bargaining power of suppliers, bargainingpower of buyers, and threat of substituteproducts and services. A change in any oneof these forces means the company will haveto re-examine its situation in the market. TheFive Forces framework, in many ways,formed the foundations of business strategyas we know it today.

Yamini Panchal

Clusters: Porter iscredited with the idea of having clusters, or“geographic concentrationsof interconnectedcompanies, specializedsuppliers, service providers,and associated institutions ina particular field that arepresent in a nation orregion’’. The idea is simple:enhance productivity andhence, competitiveness.

PORTER’S BIG IDEAS

There is a lot of confusionabout what strategyreally is, and how todefine it—a lot of confusion betweenstrategy and operationaleffectiveness. That is oneof the most importantdistinctions in all of management

TDSAT notice to Trai on ADCNew Delhi: Admitting plea of BSNL over removal of accessdeficit charge, the rural remu-neration levy,TDSAT on Mon-day issued notice to the sectoralregulator Trai. TDSAT direct-ed Trai to file its reply within

four weeks. During the pro-

ceedings,counsel appearing forthe PSU submitted that the reg-ulator arbitrarily removed theADC. He said despite the lowcost service provided by thetelecom giant,Trai rejected itsaying BSNL will not get a sin-

gle penny after 2008. AGENCIES

 After MS rejection,Yang faces rebellionSan Francisco: After spurn-

ing the $47.5-billion Mi-

crosoft Corpoffer for thecompany heco-founded14 years ago,Yahoo chief 

Jerry Yang may now only havea few months to convince WallStreet that his rebuff was asmart move. If he can’t, ana-lysts won’t be surprised if Yangis either replaced as CEO orforced to consider accepting alower offer if Microsoft comesknocking at his door again.

“This squarely puts thepressure on Jerry Yang to de-liver results and shareholdervalue,’’ Standard & Poor’s eq-uity analyst Scott Kessler said.“You are going to see a lot of shareholders just throwing inthe towel because they are go-ing to realize it’s going to takeawhile for the stock to get backto where it was Friday.’’

The backlash is expected tobegin Monday when Kesslerand other analysts believe Ya-hoo’s stock price will surren-der most, if not all,of its 50%gain since Microsoft made itsinitial offer January 31.The an-ticipated sell-off will leave Ya-hoo’s market value hoveringaround $30 billion.

Yahoo shares tumbled over23%, or $6.67, to $22 in pre-market trading. In Frankfurt,

Germany, two hours beforetrading opened in New York,Yahoo shares fell 18.6% to

14.74 ($22.79). Microsoft’sshares rose 4.3%, or $1.26, to$30.50 in pre-market trading.The shares had declined 10%to $29.24 since the bid, reflect-ing concerns that the proposedmarriage will turn into a com-plicated mess that will enableGoogle to g row even stronger.

“Clearly there’s frustra-tion,’’ said Darren Chervitz, co-manager of the Jacob InternetFund,which owns Yahoo stock.“I am not even sure if Yahoocares about its shareholders be-cause they didn’t show muchregard for shareholders’ bestinterests in this process.’’

Accompanied by fellow Ya-hoo co-founder David Filo,Yangflew to Seattle on Saturday toinform Ballmer that the com-pany wouldn’t sell for less than

$37 per share—a price that Ya-hoo’s stock hasn’t reached sinceJanuary 2006.An alysts and in-vestors were left to wonder whythe two sides couldn’t compro-mise at $35 per share. “There isprobably blame to go aroundon both sides,but I think mostof it is in Yang’s hands,’’Chervitz said. AP

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NOTICE is hereby given that our client ,MR . VRAJLAL T. GALA has filed a

Petition under Sections 397 to 402 of the Companies Act , 1956 against

Mr. Rashmikant Shah,Mr. Bhavarlal Saremal Kothari,Mr. Manekchand

Saremal Kothari and Orient Realtors Pvt. Ltd. (“the Company”) & Others

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SdI- C.D. Mehta(Partner)

Advocates for Mr. Vrajlal T. Gala

PUBLIC NOTICE

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