This 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); 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 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 Competition
Professor Michael E. Porter
Harvard Business School
BSP International Conference
Pont Fer, Phoenix, Mauritius
Thinking Strategically
COMPETING
TO BE THE BEST
COMPETING
TO BE UNIQUE
The worst error in strategy is to compete
What Do We Mean by a Strategy?
• Strategy is different than
aspirations
–
“Our strategy is to be #1 or #2…”
–
“Our strategy is to grow…”
–
“Our strategy is to provide superior returns to our shareholders…”
• Strategy is more than a
particular action
–
“Our strategy is to merge…”
–
“… internationalize…”
–
“… consolidate the industry…”
–
“…double our R&D budget…”
• Strategy is not the same as
vision / values
–
“Our strategy is to serve our customers and communities meeting the highest standards
of integrity…”
• Strategy defines the company’s
distinctive approach
to competing
and the
competitive advantages
on which it will be based
Setting the Right Financial Goals
• Strategic thinking starts with setting
proper financial goals
for the company
• The fundamental goal of a company is
superior long-term return on
investment
•
Growth
is good
only
if superiority in ROIC is achieved and sustained
– ROIC threshold
•
What
set of businesses
to compete in
• Capturing
synergies
across business
units
Levels of Strategy
• How to compete in each
distinct business or
industry
Corporate Strategy
Competitive or
Business Strategy
• Company economic performance results from
two
distinct causes
• Companies need to focus on the
health of the industry
, which can
be as important as a company’s own position
Industry
Structure
Strategic Positioning
Within the Industry
- Industry Attractiveness
- Sustainable Competitive Advantage
Business Strategy
• Part of strategy is to drive a
positive transformation
in industry structure
Threat of Substitute
Products or Services
Threat of New
Entrants
Rivalry Among
Existing
Competitors
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
Understanding Industry Structure
• Part of strategy is to drive a
positive transformation
in industry structure
Threat of Substitute
Products or Services
Threat of New
Entrants
Rivalry Among
Existing
Competitors
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
Understanding Industry Structure
• Channels
• End users
•
Price takers for feedstocks
and energy
•
Contracts pass through
input costs
Bargaining Power
of Suppliers
Rivalry Among
Existing
Competitors
Bargaining Power
of Buyers
Threat of New
Entrants
Threat of Substitute
Products or
Services
•
High capital cost to enter
•
Need to achieve customer density to
be efficient
•
Rising environmental requirements
•
Numerous types of gas sold to
diverse customers (e.g.
oxygen, hydrogen)
•
The product is a commodity
•
Four large companies control
2/3 of the global market
•
Customers are industrial producers,
energy companies, health care
facilities, metal producers, and others
•
Gases are a small part of total cost
but significantly improve productivity
•
Long-term contracts and on-site
facilities at customers create
switching costs
•
High transport costs create benefits
of customer density and local market
barriers
•
Use of industrial gases in
industrial production and
other fields is growing
versus alternative methods
Analyzing Industry Structure
• Large independent
suppliers of branded
engines and drive
train components
• Unionized labor
Bargaining Power
of Suppliers
Rivalry Among
Existing
Competitors
Bargaining Power
of Buyers
Threat of New
Entrants
Threat of Substitute
Products or
Services
• Limited entry barriers
for assemblers
• Vigorous price
competition on
standardized models
• Rising environmental
and energy
requirements
• Trucking company
consolidation into large
fleets
• Rise of leasing companies
• Small fleets and
owner operators
• Railroads
• Water transportation
Industry Structure and Positioning
Industry Structure and Positioning
Paccar
• Focus on
owner-operators
• Compete on
differentiation
– Design trucks with
special features
and
amenities
– Customization and
build-to-order
– Design for low truck
operating
costs
– Offer extensive
roadside assistance
to truckers
• Command a
premium
price
• Paccar’s positioning avoids the
negative aspects of industry
Machinery, ingredient, and
package suppliers
•
Ties packaging material
sales to sale of machines
Bargaining Power
of Suppliers
Rivalry Among
Existing
Competitors
Bargaining Power
of Buyers
Threat of New
Entrants
Threat of Substitute
Products or
Services
New entrants to aseptic packaging
•
Provides extensive assistance and
financing to bring new packers into
aseptic
Food packaging companies
•
Provides standard products and
technical assistance and
support to level the playing field
among its customers
Consumer and food-away-from-home
food companies
•
Invests in educating, and supporting
food companies to shift to aseptic
packaging and working with Tetra Pak
customers
Other package types and
packaging technologies
(refrigerated, retort cans/ bottles)
•
Aggressively advocates aseptic
packaging versus other forms
•
Big focus on sustainability
Shaping Industry Structure
Shifting the Nature of Industry Competition
Zero Sum
Competition
Positive Sum
Competition
• Compete
head to head
on
price
• One company’s
gain
requires
another company’s
loss
• Competition
dissipates
industry structure and
profitability
• Compete on
distinctive
strategic positioning
•
More than one
company
can be successful
• Competition
expands
the
customers served, the
needs that are met, and the
overall value pool
Positioning
Types of Competitive Advantage
Differentiation
(Premium Price)
Lower Cost
Competitive
Advantage
• Operating Cost
• Utilization of Capital
• The value chain is the
activities
involved in delivering value to customers
• Strategy is reflected in the
set of choices
about how activities are
configured and
linked together
Sources of Competitive Advantage
The Value Chain
Support
Activities
Marketing
& Sales
(e.g., Sales
Force,
Promotion,
Advertising,
Proposal
Writing,
Website)
Inbound
Logistics
(e.g., Customer
Access, Data
Collection,
Incoming
Material
Storage,
Service)
Operations
(e.g., Branch
Operations,
Assembly,
Component
Fabrication)
Outbound
Logistics
(e.g., Order
Processing,
Warehousing,
Report
Preparation)
After-Sales
Service
(e.g., Installation,
Customer
Support,
Complaint
Resolution,
Repair)
M
a
r
g
i
n
Primary Activities
Firm Infrastructure
(e.g., Financing, Planning, Investor Relations)
Procurement
(e.g., Services, Machines, Advertising, Data)
Technology Development
(e.g., Product Design, Process Design, Market Research)
Human Resource Management
(e.g., Recruiting, Training, Compensation System)
Value
What
buyers are
willing to
pay
• Creating a
unique
value
proposition
• Assimilating, attaining, and
extending
best practices
Operational
Effectiveness
Operational Effectiveness Versus Strategy
Doing
the same things
better
and better
Doing things
differently
to
deliver distinctive value
Validating and Executing
Making Choices
Strategic
Positioning
Tests of a Successful Strategy
Defining the Value Proposition
What Relative
Price?
What
Customers?
Which Needs?
•
What end users?
•
What channels?
•
Which products?
•
Which features?
•
Which services?
• A novel value proposition can
expand the market
• Finding a unique value proposition often involves a new
way of
segmenting
the market
•
Premium? Parity?
Discount?
Strategic Positioning
IKEA, Sweden
Value Proposition
•
A wide line of
stylish, functional
and
good quality
furniture and accessories
sold with
limited customer service
Tests of a Successful Strategy
• A
unique value proposition
compared to competitors
• A
distinctive value chain
involving clear choices about how
the company will
operate differently
to deliver its value
Strategic Positioning
IKEA, Sweden
•
Wide range of styles which are
all displayed
in
huge warehouse stores with
large on-site
inventories
•
Modular
, ready-to-assemble, easy to ship
furniture designs
•
In-house
design of all products
•
IKEA designer names attached to related
products to inform
coordinated
purchases
•
Self-selection
by the customer, with minimal
in-store service
•
Extensive customer information
in the form
of catalogs, mobile app, website, explanatory
ticketing, do-it-yourself videos, online planning
tools, and assembly instructions
•
Self-delivery
by most customers
•
Suburban and urban locations
with large
parking lots
•
Long
hours of operation
•
On-site
, low-cost restaurants
•
Child care
provided in the store
Value Proposition
Distinctive Activities
•
A wide line of
stylish, functional
and
good quality
furniture and accessories
sold with
limited customer service
•
Highly
customized
trucks targeted at
owner-operators
offering superior amenities but low cost
of operations and providing extensive customer
support
•
Command a 10% premium price
•
Customized features and amenities geared toward
owner-operators (e.g., luxurious sleeper cabins,
plush leather seats, noise-insulated cabins, sleek
exterior styling, etc.)
•
Products designed for durability and resale value
•
Industry leader in fuel efficiency and emissions
reduction, including hybrids
•
Provide diagnostic services for customers (e.g.,
fuel efficiency, remote service analysis)
•
Offer truck financing, leasing and insurance
services
•
Flexible manufacturing system configured for
customization
•
Built to order, not to stock
•
Extensive dealer network (1,800 locations) to
provide extensive customer contact and
aftermarket support
•
Extensive roadside assistance network
•
24-hour parts distribution system providing rapid
repair and uptime
Value Proposition
Distinctive Activities
Strategic Positioning
Tests of a Successful Strategy
• A
unique value proposition
compared to competitors
• A
distinctive value chain
involving clear choices about how
the company will
operate differently
to deliver its value
proposition
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 outside suppliers
•
Medium sized showrooms with limited portion of
available models on display
•
Limited inventories / order with lead time
•
Extensive sales assistance
•
Traditional retail hours
Making Strategic Tradeoffs
IKEA, Sweden
Product
•
Low-priced, modular, ready-to-assemble designs
•
No custom options
•
Furniture design driven by style, manufacturing cost
and assembly simplicity
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
IKEA
Typical Furniture Retailer
• Tradeoffs create the need for
choice
• A
unique value proposition
compared to competitors
• A
distinctive value chain
involving clear choices about how
the company will
operate differently
to deliver its value
proposition
• Making clear tradeoffs, and choosing what
not to do
• Integrating activity choices across the value chain to
fit
together
and
reinforce each other
Typical Thinking About the Sources of Competitive
Advantage
• Competitive advantage is usually seen as
concentrated in a few parts
of the
value chain
•
“Key” Success Factors
•
“Core” Competencies
Complete but limited
line of furniture and
accessories to
furnish apartments
and other living
spaces
Mutually Reinforcing Activity Choices
IKEA
Customer self
delivery and
Assembly
Self-selection
by customer
Low
manufacturing
and logistical
costs
Modular,
scalable
furniture
designs
All items on
display and
in-stock
Very large
stores
High variety,
but ease of
manufacturing
In-house
design focused
on cost of
manufacturing
Designer
identification
of compatible
lines
Ease of
transport and
assembly
“Knock-down”
kit packaging
Instructions
and support
for customer
assembly
100 percent
sourcing from
Long-term
suppliers
Explanatory
catalogs,
Informative
displays and
Labels
Year-round
stocking to even
out production
High traffic
store layout
Suburban
locations with
ample
parking
Very low
prices
• A
unique value proposition
compared to competitors
• A
distinctive value chain
involving clear choices about how
the company will
operate differently
to deliver its value
proposition
• Making clear tradeoffs, and choosing what
not to do
• Integrating activity choices across the value chain to
fit
together
and
reinforce each other
•
Continuity
of strategic direction with continuous
improvement in realizing the unique value proposition
Strategic Continuity
•
Continuity of strategy
is essential to creating and sustaining competitive
advantage
–
Understanding the strategy
throughout the organization
– Building truly
unique skills
and
assets
related to the strategy
– Establishing a clear
identity
with customers, channels, and vendors
•
“Reinvention”
and
frequent shifts in direction
are costly and confuse the
customer, the industry, and the organization
• Maintain continuity in the
value proposition
, but
continuously improve
how
to
realize
it
• Continuity of strategy allows
faster improvement
• Understanding
industry structure
• Finding a
novel value proposition
– Creative segmentation
•
Home-city replacement cars to drivers whose cars
are being repaired or who need an extra vehicle, at
low rates (30% below airport rates)
•
Affordable home-city rentals for occasional drivers
who do not own a car
•
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
•
Offers flexible hourly rental through automated
technology (Enterprise CarShare)
•
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 using traditional and social
media
•
Cultivate strong relationships with auto
dealerships, body shops, and insurance adjusters
•
Hire extroverted college graduates to encourage
community interaction, customer service, and
university relationships
•
Employ a highly sophisticated computer network
to track its fleet
Value Proposition
Distinctive Activities
Creative Segmentation
• Understanding
industry structure
• Finding a
novel value proposition
– Creative segmentation
•
Reinventing
the value chain
Reinventing the Value Chain
Nespresso
•
Uniquely high quality, easy-to-prepare
single-serve espresso coffee at a
premium price
•
Discriminating, convenience-sensitive
consumers and offices
•
Extra-high quality ground coffee in 21 varieties
•
Individually proportioned capsules for
freshness and ease of use
•
Tailored espresso machines manufactured by
high-end machine vendors
•
Capsules sold only online or through about 300
coffee boutique shops in major cities, not in
mass market food channels
•
Nespresso Club to achieve high levels of
communication with customers
•
Focused image-oriented media advertising
• Understanding
industry structure
• Finding a
novel value proposition
– Creative segmentation
•
Reinventing
the value chain
• Recognizing and capitalizing on
changes
, technology,
customers, needs, regulation, and others
• Successful strategies involve a core strategic insight that is
improved and expanded
over time
Growing Strategically
1.
Make the strategy even
more distinctive
– Introduce new technologies, features, products or services that
leverage other
distinctive activities
within the value chain
– Create a
social dimension
to the value proposition and 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
value the strategy
Growth Pitfalls
• 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 market share
• In many cases, shareholders are actually best served by moderate growth
,
Internationalization
Strategic Principles
• Internationalize in ways that
reinforce the company’s strategy
• Internationalize first in product lines or customer segments where the company
has the
most unique advantages
•
Prioritize markets
to enter
– Similar needs and segments
– Expatriates
• Gain
direct access to foreign markets
as soon as practical rather than relying
solely on intermediaries
• Use
alliances
selectively as
transitional
strategies
– Ensure that alliances do not
block
the company’s ability to gain competitive advantage
and build its own capabilities
• Locate and integrate manufacturing and other activities from a
regional
perspective
Defining the Industry: Product Scope
Support
Activities
Marketing & Sales (e.g., Sales Force, Promotion, Advertising, Proposal Writing, Web site) Inbound Logistics (e.g., Incoming Material Storage, Data Collection, Service, Customer Access) Operations (e.g., Assembly, Component Fabrication, Branch Operations) Outbound Logistics (e.g., Order Processing, Warehousing, Report Preparation) After-Sales Service (e.g., Installation, Customer Support, Complaint Resolution, Repair) M a r g i nPrimary 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
• A distinct strategy is needed for
each distinct business
Threat of Substitute Products or Services Threat of New Entrants Rivalry Among Existing Competitors Bargaining Power of Suppliers Bargaining Power of Buyers
•
What set of products constitute the relevant industry?
•
e.g., Trucks vs. Heavy Trucks
Industry Definition
Defining the Industry: Geographic Scope
Support
Activities
Marketing & Sales (e.g., Sales Force, Promotion, Advertising, Proposal Writing, Web site) Inbound Logistics (e.g., Incoming Material Storage, Data Collection, Service, Customer Access) Operations (e.g., Assembly, Component Fabrication, Branch Operations) Outbound Logistics (e.g., Order Processing, Warehousing, Report Preparation) After-Sales Service (e.g., Installation, Customer Support, Complaint Resolution, Repair) M a r g i nPrimary 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
• Geographic scope of competition is determined by the ability to
leverage activities in the
value chain across borders
• Industries
differ substantially
in the geographic scope of competition
Regional
Local / State
National
• Integrated global
value chain
• Activities located
and shared from a
worldwide
perspective
Global
•
What
set of businesses
to compete in
• Capturing
synergies
across business
units
Levels of Strategy
• How to compete in each
distinct business or
industry
Corporate Strategy
Competitive or
Business Strategy
Fundamentals of Corporate Strategy
• Overall corporate size or diversity per se
does not create economic value
• Competition occurs at the level of
individual businesses
, where competitive
advantage resides
• Being part of a diversified company involves
inevitable costs
for business
units
• Shareholders can
diversify directly
at lower cost
• A successful corporate strategy must produce clear and significant benefits to
the
competitive advantage of business units
- The central issue is how being part of the corporation
adds value
to each
business
Car
Dealership
Financial
Services
Sugar
Airline
Hotel
Real Estate
Services
Computer
Wholesaler
Grocery
Stores
Fast Food
Franchises
Industrial
Parts
Imports/
Distribution
Food
Processing
Tobacco
Textiles
Diversification in Emerging Economies
Company Transformation and Economic Development
The Company Agenda in Developing Economies
1.
Dominant share of the local, protected
market
2.
Opportunistic to capitalize on opportunities
created by instability and government
policies
3.
“Me-too” strategies imitating foreign
companies based on low prices and low
input costs
4.
Low quality and inefficiency are tolerated
5.
Short time horizon and low investment in
people, brands and technology
6.
Limited participation in the value chain with
concentration on production activities
• Pursue a distinctive position in regional and
international markets
• A long-term strategy for competing in each
industry
• Create a distinctive value
proposition
• Move to international best practices
• Sustained investment in human resources and
technological capabilities
• Master the entire value chain, including
technology, IT, and marketing
7.
Wide product line focused on local market
8.
Exports focused on labor-intensive
commodities or goods to advanced
economies
9.
Heavy reliance on partners through OEM
agreements, foreign distributors, and joint
ventures
10. Conglomerate business groups operating in
many disparate fields
11. Economic policy is left to government
• Focus on distinctive products to serve local
and regional markets
• Export more differentiated, branded products
and services to neighbors and niche markets
in advanced countries
• Gain direct control of distribution, customer
relationships, and technology needed to serve
international markets
• Related diversification that creates synergies
• Companies take a leadership role in
upgrading their cluster and improving the
business environment
Traditional
Aspiration
Company Transformation and Economic Development
Direct
Marketing
Cruise
Line
Corporate Strategy
The Walt Disney Company, 2010
Disney
Channel
Family
Motion
Pictures
Consumer
Products
Sports
Team
Multi-
media
Productions
Broadway
Productions
Acquired
Through Cap
Cities / ABC
Merger
Traveling
Shows
Youth
Books and
Educational
Materials
•
Shared characters
•
Shared brand
•
Shared family values
•
Cross-promotions
Marvel
Hollywood
Pictures
Real
Estate
Develop-
ment
Time
Sharing
Television
Stations
Broadway
Theater
Television
Network
Hollywood
Records
Motion
Picture
Distribution
Disney
Records
Retail
Stores
Animated
Feature Films
Television
Program-
ming
Theme
Parks
Pixar
Guided
Travel
Disney
Interactive
Media
Recent
ESPN
Adult
Cable
Channels
Radio
Stations
Adult
Publishing /
Newspapers
Hyperion
Books
Resort
Hotels
• Leveraging fit
across the value chains
of business units
–
Sharing activities
across business units
– Harnessing
proprietary knowledge and skills
across units
• One-time savings in overhead are
not
enough
M
a
r
g
i
n
M
a
r
g
i
n
Corporate Strategy
Amazon Retail
•
Amazon Price Check mobile app allows for instant
comparison of in-store vs. Amazon prices
•
Targeted product recommendations help customers
find items they might be interested in
•
Customer reviews available for all products, with
most helpful reviews prioritized
•
Expand product offering by opening web platform to
third-party sellers
•
Large selection of digital products as well as physical
•
Subscribe & Save service offers discounts and
convenience for recurring orders
•
Vast distribution network and hi-tech inventory
management system allow for fast and low cost
delivery
•
Fulfillment by Amazon (FBA) expands third party
product base and reduces shipping times
•
Amazon Prime membership offers free two-day
shipping, and inexpensive one-day shipping,
encouraging loyalty and creating advantages over
narrower competitors
•
Utilizes extensive IT investment to build proactive,
automated customer service systems
Value Proposition
Distinctive Activities
•
Exhaustive product offering (digital and
physical goods) through its e-commerce
marketplace
•
Low price across the entire
product range
•
Convenient self-service online shopping
experience and fast, reliable delivery
The Process of Developing a Strategy
Business Unit Strategy
• Focused on
industry structure
and
positioning
• Strategy should be developed and periodically reviewed in a
formal
process rather than being
left to occur spontaneously
• Business unit strategy development is best done in a
multifunctional business unit team
including the
business unit head
and
heads of important functions
– The strategy team is
relatively small
– The team needs to
work together
not separately
– The strategic planning department serves as
staff
• Strategic planning should be
separate
from budgeting
• A strategy review, which examines the
assumptions
on which the strategy is based, should
take place formally
at least once per year
Corporate Strategy
• Focused on the
scope
of businesses in the portfolio and
synergy
• Corporate strategy is the responsibility of the
CEO and the leadership team
•
Input
can be solicited
more broadly
among management
Communicating Strategy
• Strategy involves
everyone
in an organization, not just senior management
• The basic strategy and value proposition must also be communicated to
customers,
channels, suppliers, and financial markets
– What about confidentiality?
• The benefits of strategy are greatest when it is
communicated widely
in the organization
• Communicating strategy requires a simple and vivid way of describing the
essence of the
company’s unique position
– Symbols of the strategy are invaluable tools
– Repetition
• Leaders should
not assume
that subordinates understand the strategy, or that they
agree
with it
– Help each organizational unit
translate
the strategy into implications for its own mandate
• Individuals who do not ultimately accept the strategy
cannot have an ongoing role in the
company
20140402—BSP Group Strategy Presentation—FINAL
