Professor Michael E. Porter Harvard Business School Leaders in London London, UK  November 29, 2007 Getting Strategy Right...
How Managers Think About Competition COMPETING TO BE THE BEST COMPETING TO BE UNIQUE <ul><li>The worst error in strategy i...
Flawed Concepts of Strategy <ul><li>Strategy as  action </li></ul><ul><ul><li>“ Our strategy is to merge…” </li></ul></ul>...
Setting the Right Goals <ul><li>The fundamental goal of a company is  superior long-term return on investment   </li></ul>...
Economic Performance versus Shareholder Value Economic Performance Shareholder Value <ul><li>Sustained ROIC </li></ul><ul>...
Economic Foundations of Competition Industry Structure Relative Position  Within the  Industry -  Overall Rules of Competi...
Disaggregating Economic Performance:  Industry vs. Position  Return on Invested Capital 1985-2002 25.4% 30.8% Note: ‘Inves...
Profitability of Selected U.S. Industries 1992 - 2006 <ul><li>Return on invested capital, 1992 – 2006 average </li></ul>RO...
Determinants of Industry Profitability Threat of Substitute Products or Services Threat of New Entrants Rivalry Among Exis...
Worst Shifting the Basis of Competition Same Dimension(s) (zero sum) Different Dimensions Price Non Price Homogeneity of C...
Is There A Sixth Force? <ul><li>Industry growth rate </li></ul><ul><li>Technology and innovation </li></ul><ul><li>Governm...
Strategic Implications of Industry Structure <ul><li>Large suppliers of engines and drive train components </li></ul>Barga...
Paccar Competitive Positioning <ul><li>Focus on owner-operators </li></ul><ul><li>Design trucks with special features and ...
Strategic Implications of Industry Structure 2.  Shaping Industry Structure Foodservice Distribution Industry Bargaining P...
Reshaping Industry Structure Foodservice Distribution <ul><li>Offering value-added services </li></ul><ul><li>Offering pri...
Determinants of Relative Performance Differentiation (Higher Price) Lower Cost Competitive Advantage
Economics of Strategic Positioning Southwest Airlines Cents per ASM Note: ASM (Available Seat Miles) defined as total seat...
Foundations of Economic Performance The Value Chain <ul><ul><li>Competing in a business involves performing a set of discr...
Achieving Superior Performance Operational Effectiveness is Not Strategy <ul><ul><li>Creating a  unique  and  sustainable ...
Five Tests of a Good Strategy <ul><li>A  unique value proposition  compared to other organizations </li></ul><ul><li>A  di...
Strategic Positioning Enterprise Rent-A-Car <ul><li>Home-city replacement cars for drivers whose cars are being repaired o...
Defining the Value Proposition What Relative Price? What Customers? Which Needs? <ul><li>What end users? </li></ul><ul><li...
Strategic Positioning IKEA, Sweden <ul><li>Young, first time, or price-sensitive buyers who want stylish, space efficient ...
Strategic Positioning Whole Foods Markets <ul><li>Natural, fresh, organic, and prepared foods and health items with excell...
Making Strategic Tradeoffs <ul><li>Tradeoffs occur when  strategic positions are  incompatible </li></ul><ul><ul><li>The n...
Strategic Tradeoffs Neutrogena Soap (1990)  <ul><ul><li>Forgo cleaning, skin softening, and deodorizing features </li></ul...
Strategic Tradeoffs IKEA, Sweden <ul><li>Product </li></ul><ul><li>Higher priced, fully assembled products  </li></ul><ul>...
Recent Thinking on the Sources of Competitive Advantage <ul><ul><li>“ Key” Success Factors </li></ul></ul><ul><ul><li>“ Co...
Mutually Reinforcing Activities  Zara Apparel Source:  Draws on research by Jorge Lopez Ramon (IESE) at the Institute for ...
Strategic Continuity <ul><li>Continuity of strategy  is fundamental to sustainable competitive advantage </li></ul><ul><ul...
Barriers to Strategy <ul><li>Flawed Concepts </li></ul><ul><li>Misunderstanding  of strategy itself </li></ul><ul><li>Poor...
Overcoming Barriers to Strategy <ul><li>Internal Practices </li></ul><ul><li>Inappropriate  goals  and  performance   metr...
Internal Barriers to Strategy Neutrogena Soap (2005) <ul><li>Prior to the 1990’s Neutrogena was the number one brand recom...
Overcoming Barriers to Strategy   Capital Market Biases <ul><li>Strong pressure for  short-term “surprises”  in earnings o...
Integrating Strategy and Corporate Social Responsibility <ul><li>There is a long-term  synergy  between economic and socia...
Strategic Positioning Whole Foods Markets <ul><li>Natural, fresh, organic, and prepared foods and health items with excell...
Strategic CSR ChoicePoint <ul><li>ChoicePoint’s core business is providing  personal identification ,  screening , and  cr...
Strategic CSR Nestlé in India <ul><li>Nestlé’s entered the poor Moga region of India in 1962 </li></ul><ul><li>Local milk ...
Strategy <ul><li>A  unique value proposition  versus competitors </li></ul><ul><li>A  different , tailored value chain </l...
Communicating a Strategy <ul><li>Strategy involves  everyone  in an organization, not just top management </li></ul><ul><l...
The Role of Leaders in Strategy <ul><li>Lead the  process of choosing  the company’s unique position </li></ul><ul><ul><li...
The Moral Purpose of Business <ul><li>The most important thing a corporation can do for society is to contribute to a  pro...
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  • Does your organization have a strategy? Non-profit Government department Company Pressures: financial markets / investors Opportunity: global economy Bigger and bigger Many companies are confused about strategy Strategic mistakes come from inside, not changes in external environment
  • Spp Prof Porter London Final

    1. 1. Professor Michael E. Porter Harvard Business School Leaders in London London, UK November 29, 2007 Getting Strategy Right 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); “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 . Version: November 26, 2007, 6pm
    2. 2. How Managers Think About Competition COMPETING TO BE THE BEST COMPETING TO BE UNIQUE <ul><li>The worst error in strategy is to compete with rivals on the same dimensions </li></ul>
    3. 3. Flawed Concepts of Strategy <ul><li>Strategy as action </li></ul><ul><ul><li>“ Our strategy is to merge…” </li></ul></ul><ul><ul><li>“… internationalize…” </li></ul></ul><ul><ul><li>“… consolidate the industry…” </li></ul></ul><ul><ul><li>“… outsource…” </li></ul></ul><ul><li>Strategy as aspiration </li></ul><ul><ul><li>“ Our strategy is to be #1 or #2…” </li></ul></ul><ul><ul><li>“ Our strategy is to grow…” </li></ul></ul><ul><ul><li>“ Our strategy is to be the world leader…” </li></ul></ul><ul><li>Strategy as vision </li></ul><ul><ul><li>“ Our strategy is to meet our customers’ needs…” </li></ul></ul><ul><ul><li>“… offer superior products…” </li></ul></ul><ul><ul><li>“… to advance technology for mankind…” </li></ul></ul>
    4. 4. Setting the Right Goals <ul><li>The fundamental goal of a company is superior long-term return on investment </li></ul><ul><li>Growth is good only if superiority in ROIC is achieved and sustained </li></ul><ul><ul><li>ROIC threshold </li></ul></ul><ul><li>Profitability must be measured realistically, capturing the actual profits on the full investment </li></ul><ul><li>Prevalent accounting adjustments to reported profitability (e.g., writeoffs, restructuring charges) can obscure true economic performance and lead to bad competitive choices </li></ul><ul><li>Profitability metrics besides ROIC (e.g., return on sales; ebitda margin; pro-forma earnings; and cash flow margin) are risky for strategy </li></ul><ul><li>Goodwill must be treated as part of investment </li></ul><ul><li>Setting unrealistic profitability or growth targets can undermine strategy </li></ul>
    5. 5. Economic Performance versus Shareholder Value Economic Performance Shareholder Value <ul><li>Sustained ROIC </li></ul><ul><li>Sustainable Revenue Growth </li></ul><ul><li>Stock Price </li></ul><ul><li>EPS </li></ul><ul><li>EPS Growth </li></ul><ul><li>Shareholder value is the result of creating real economic value </li></ul><ul><li>Pleasing today’s shareholders is not the goal </li></ul>
    6. 6. Economic Foundations of Competition Industry Structure Relative Position Within the Industry - Overall Rules of Competition - Sources of Competitive Advantage <ul><li>The fundamental unit of strategic analysis is the industry </li></ul><ul><ul><li>Defining the relevant industry is important to strategy </li></ul></ul><ul><li>Company economic performance results from two distinct causes </li></ul><ul><li>Strategy must encompass both </li></ul>
    7. 7. Disaggregating Economic Performance: Industry vs. Position Return on Invested Capital 1985-2002 25.4% 30.8% Note: ‘Invested capital less excess cash’ is the average of the beginning period and the ending period values. Excess cash is calculated by subtracting cash in excess of 10% of annual revenue. Source: Compustat (2007), author’s analysis 31.4% Industry Average 9.6%
    8. 8. Profitability of Selected U.S. Industries 1992 - 2006 <ul><li>Return on invested capital, 1992 – 2006 average </li></ul>ROIC = Earnings before interest and taxes divided by invested capital less excess cash Note: ‘Invested capital less excess cash’ is the average of the beginning period and the ending period values. Excess cash is calculated by subtracting cash in excess of 10% of annual revenue. Source: Compustat (2007), author’s analysis Average industry ROIC in the US:14.9%
    9. 9. Determinants of Industry Profitability Threat of Substitute Products or Services Threat of New Entrants Rivalry Among Existing Competitors Bargaining Power of Suppliers Bargaining Power of Buyers
    10. 10. Worst Shifting the Basis of Competition Same Dimension(s) (zero sum) Different Dimensions Price Non Price Homogeneity of Competition Dimensions of Competition
    11. 11. Is There A Sixth Force? <ul><li>Industry growth rate </li></ul><ul><li>Technology and innovation </li></ul><ul><li>Government </li></ul><ul><li>Complementary products and services </li></ul><ul><li>Effect on profitability depends on how each attribute affects the five forces </li></ul>
    12. 12. Strategic Implications of Industry Structure <ul><li>Large suppliers of engines and drive train components </li></ul>Bargaining Power of Suppliers Rivalry Among Existing Competitors Bargaining Power of Buyers Threat of New Entrants Threat of Substitute Products or Services <ul><li>Many truck producers are assemblers </li></ul><ul><li>Heavy price competition on standardized models </li></ul><ul><li>Large fleets </li></ul><ul><li>Leasing companies </li></ul><ul><li>Owner operators </li></ul><ul><li>Railroads </li></ul><ul><li>Water transportation </li></ul><ul><li>Positioning to Mute the Five Forces </li></ul><ul><li>Heavy Truck Industry </li></ul>
    13. 13. Paccar Competitive Positioning <ul><li>Focus on owner-operators </li></ul><ul><li>Design trucks with special features and amenities </li></ul><ul><li>Customization and build-to-order </li></ul><ul><li>Achieve low truck operating costs </li></ul><ul><li>Offer extensive roadside assistance to truckers </li></ul>
    14. 14. Strategic Implications of Industry Structure 2. Shaping Industry Structure Foodservice Distribution Industry Bargaining Power of Suppliers Rivalry Among Existing Competitors Bargaining Power of Buyers Threat of New Entrants Threat of Substitute Products or Services <ul><li>Food processors </li></ul><ul><li>Food cooperatives </li></ul><ul><li>Farmers </li></ul><ul><li>Low barriers to entry </li></ul><ul><li>Distributors </li></ul><ul><ul><li>Purchasing </li></ul></ul><ul><ul><li>Warehousing </li></ul></ul><ul><ul><li>Delivery </li></ul></ul><ul><li>Restaurants </li></ul><ul><li>Schools </li></ul><ul><li>Hospitals </li></ul><ul><li>Cafeterias </li></ul><ul><li>Other food service establishments </li></ul><ul><li>Go direct </li></ul><ul><li>Use retail / warehouse channels </li></ul>
    15. 15. Reshaping Industry Structure Foodservice Distribution <ul><li>Offering value-added services </li></ul><ul><li>Offering private-label products </li></ul><ul><li>Moving to national procurement contracts </li></ul><ul><li>Increasing the use of sophisticated information technology </li></ul>
    16. 16. Determinants of Relative Performance Differentiation (Higher Price) Lower Cost Competitive Advantage
    17. 17. Economics of Strategic Positioning Southwest Airlines Cents per ASM Note: ASM (Available Seat Miles) defined as total seats available multiplied by miles flown Source: 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
    18. 18. Foundations of Economic Performance The Value Chain <ul><ul><li>Competing in a business involves performing a set of discrete activities , in which competitive advantage resides </li></ul></ul>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 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
    19. 19. Achieving Superior Performance Operational Effectiveness is Not Strategy <ul><ul><li>Creating a unique and sustainable competitive position </li></ul></ul><ul><li>Assimilating, attaining, and extending best practices </li></ul>Operational Effectiveness Strategic Positioning Run the same race faster Choose to run a different race
    20. 20. Five Tests of a Good Strategy <ul><li>A unique value proposition compared to other organizations </li></ul><ul><li>A different , tailored value chain </li></ul><ul><li>Clear tradeoffs, and choosing what not to do </li></ul><ul><li>Activities that fit together and reinforce each other </li></ul><ul><li>Strategic continuity with continual improvement in realizing the strategy </li></ul>
    21. 21. Strategic Positioning Enterprise Rent-A-Car <ul><li>Home-city replacement cars for drivers whose cars are being repaired or who need an extra vehicle, at low rates (30% below airport rates) </li></ul><ul><li>Numerous, small, inexpensive offices in each metropolitan area, including on-premises offices at major accounts </li></ul><ul><li>Open during daylight hours </li></ul><ul><li>Deliver cars to customers’ homes or rental sites, or deliver customers to cars </li></ul><ul><li>Acquire new and older cars, favoring soon-to-be discontinued older models </li></ul><ul><li>Keep cars six months longer than other major rental companies </li></ul><ul><li>In-house reservations </li></ul><ul><li>Grassroots marketing with limited television </li></ul><ul><li>Cultivate strong relationships with auto dealerships, body shops, and insurance adjusters </li></ul><ul><li>Hire extroverted college graduates to encourage community interaction and customer service </li></ul><ul><li>Employ a highly sophisticated computer network to track the fleet </li></ul>Value Proposition Distinctive Activities
    22. 22. Defining the Value Proposition What Relative Price? What Customers? Which Needs? <ul><li>What end users? </li></ul><ul><li>What channels? </li></ul><ul><li>Which products? </li></ul><ul><li>Which features? </li></ul><ul><li>Which services? </li></ul><ul><li>A novel value proposition can also grow the pie/expand the industry </li></ul>
    23. 23. Strategic Positioning IKEA, Sweden <ul><li>Young, first time, or price-sensitive buyers who want stylish, space efficient and scalable furniture and accessories at very low price points. </li></ul><ul><li>Modular, ready-to-assemble, easy to package designs </li></ul><ul><li>In-house design of all products </li></ul><ul><li>Wide range of styles in huge warehouse stores with large on-site inventories </li></ul><ul><li>Self-selection </li></ul><ul><li>Extensive customer information in the form of catalogs, explanatory ticketing, do-it-yourself videos, and assembly instructions </li></ul><ul><li>Use Ikea designer names on products to inform coordinated purchases </li></ul><ul><li>Child care provided in the store </li></ul><ul><li>On-site, low-cost, restaurants </li></ul><ul><li>Long hours of operation </li></ul><ul><li>Suburban locations with large parking lots </li></ul><ul><li>Principally self-delivery by customers </li></ul>Distinctive Activities Value Proposition
    24. 24. Strategic Positioning Whole Foods Markets <ul><li>Natural, fresh, organic, and prepared foods and health items with excellent service at premium prices </li></ul><ul><li>Educated, middle class, and affluent customers passionate about food as a part of a healthy lifestyle </li></ul><ul><li>Well-lit, inviting supermarket store formats with appealing displays and extensive prepared foods sections </li></ul><ul><li>Produce section as “theater” </li></ul><ul><li>Café-style seating areas with wireless internet for meetings and meals </li></ul><ul><li>Each store carries local produce and has the authority to contract with the local farmers </li></ul><ul><li>Information and education provided to shoppers along with products </li></ul><ul><li>High touch in-store customer service via knowledgeable, non-unionized, highly motivated personnel </li></ul><ul><li>Egalitarian compensation structure </li></ul><ul><li>Own seafood procurement and processing facilities to control quality (and price) from the boat to the counter </li></ul><ul><li>Donates 5% of profits to non-profits </li></ul><ul><li>Each store has “green projects,” directed by employees to improve environmental performance </li></ul>Value Proposition Distinctive Activities
    25. 25. Making Strategic Tradeoffs <ul><li>Tradeoffs occur when strategic positions are incompatible </li></ul><ul><ul><li>The need for a choice </li></ul></ul><ul><ul><li>Sources of Tradeoffs </li></ul></ul><ul><ul><li>Incompatible product / service features or attributes </li></ul></ul><ul><ul><li>Differences in the best configuration of activities in the value chain to deliver the chosen value proposition </li></ul></ul><ul><ul><li>Inconsistencies in image or reputation across positions </li></ul></ul><ul><ul><li>Limits on internal coordination, measurement, motivation, and control </li></ul></ul><ul><li>Tradeoffs make a strategy sustainable against imitation by established rivals </li></ul><ul><li>An essential part of strategy is choosing what not to do </li></ul>
    26. 26. Strategic Tradeoffs Neutrogena Soap (1990) <ul><ul><li>Forgo cleaning, skin softening, and deodorizing features </li></ul></ul><ul><ul><li>Choose higher costs through the configuration of: </li></ul></ul><ul><ul><ul><li>packaging </li></ul></ul></ul><ul><ul><ul><li>manufacturing </li></ul></ul></ul><ul><ul><ul><li>detailing </li></ul></ul></ul><ul><ul><ul><li>medical advertising </li></ul></ul></ul><ul><ul><ul><li>skin research </li></ul></ul></ul><ul><ul><li>Give up the ability to reach customers via: </li></ul></ul><ul><ul><ul><li>promotions </li></ul></ul></ul><ul><ul><ul><li>television </li></ul></ul></ul><ul><ul><ul><li>some distribution channels </li></ul></ul></ul>
    27. 27. Strategic Tradeoffs IKEA, Sweden <ul><li>Product </li></ul><ul><li>Higher priced, fully assembled products </li></ul><ul><li>Customization of fabrics, colors, finishes, and sizes </li></ul><ul><li>Design driven by image, materials, varieties </li></ul><ul><li>Value Chain </li></ul><ul><li>Source some or all lines from outside suppliers </li></ul><ul><li>Medium sized showrooms with limited portion of available models on display </li></ul><ul><li>Limited inventories / order with lead time </li></ul><ul><li>Extensive sales assistance </li></ul><ul><li>Traditional retail hours </li></ul><ul><li>Product </li></ul><ul><li>Low-priced, modular, ready-to-assemble designs </li></ul><ul><li>No custom options </li></ul><ul><li>Furniture design driven by cost, manufacturing simplicity, and style </li></ul><ul><li>Value Chain </li></ul><ul><li>Centralized, in-house design of all products </li></ul><ul><li>All styles on display in huge warehouse stores </li></ul><ul><li>Large on-site inventories </li></ul><ul><li>Limited sales help, but extensive customer information </li></ul><ul><li>Long hours of operation </li></ul>IKEA Typical Furniture Retailer
    28. 28. Recent Thinking on the Sources of Competitive Advantage <ul><ul><li>“ Key” Success Factors </li></ul></ul><ul><ul><li>“ Core” Competencies </li></ul></ul><ul><ul><li>“ Critical” Resources </li></ul></ul><ul><li>Competitive advantage is seen as concentrated in a few parts of the value chain </li></ul>
    29. 29. Mutually Reinforcing Activities Zara Apparel Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS Wide range of styles Customers chic but cost-conscious <ul><li>Fit is leveraging what is different to be more different </li></ul>Tight coordination with 20 wholly-owned factories JIT delivery Little media advertising Word-of-mouth marketing and repeat buying Global team of trend-spotters Advanced production machinery Cutting- edge fashion at moderate price and quality Prime store locations in high traffic areas Extensive use of store sales data Majority of production in Europe Very flexible production system Very frequent product changes
    30. 30. Strategic Continuity <ul><li>Continuity of strategy is fundamental to sustainable competitive advantage </li></ul><ul><ul><li>e.g., allows the organization to understand the strategy </li></ul></ul><ul><ul><li>building truly unique skills and assets related to the strategy </li></ul></ul><ul><ul><li>establishing a clear identity with customers, channels, and other outside entities </li></ul></ul><ul><ul><li>strengthening the fit across the value chain </li></ul></ul><ul><li>Reinvention and frequent shifts in direction are costly and confuse the customer, the industry, and the organization </li></ul><ul><li>Maintain continuity in the value proposition </li></ul><ul><li>Successful companies continuously improve in how they realize their value proposition </li></ul><ul><ul><li>Strategic continuity and continuous change should occur simultaneously . They are not inconsistent </li></ul></ul><ul><li>Continuity of strategy allows learning and change to be faster and more effective </li></ul>
    31. 31. Barriers to Strategy <ul><li>Flawed Concepts </li></ul><ul><li>Misunderstanding of strategy itself </li></ul><ul><li>Poor industry definition </li></ul><ul><li>Industry Pressures </li></ul><ul><li>Industry conventional wisdom leads all companies to follow common practices </li></ul><ul><li>Labor agreements limit ways of configuring activities </li></ul><ul><li>Regulation constrains price, product, service or process alternatives </li></ul><ul><li>Customers ask for incompatible features or request new products or services that do not fit the strategy </li></ul>
    32. 32. Overcoming Barriers to Strategy <ul><li>Internal Practices </li></ul><ul><li>Inappropriate goals and performance metrics bias strategy choices </li></ul><ul><ul><li>Short time horizon </li></ul></ul><ul><li>Rapid turnover of leadership undermines strategic direction to achieve short-term performance benefits </li></ul><ul><li>A desire for consensus blurs strategic tradeoffs </li></ul><ul><li>Inappropriate cost allocation leads to too many products, services, or customers </li></ul><ul><li>Outsourcing makes activities homogenous and less distinctive </li></ul>
    33. 33. Internal Barriers to Strategy Neutrogena Soap (2005) <ul><li>Prior to the 1990’s Neutrogena was the number one brand recommended by dermatologists </li></ul><ul><li>Neutrogena had a relatively narrow target market but deep penetration and high customer loyalty </li></ul><ul><li>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 </li></ul><ul><li>Neutrogena lost market share while Gallderma’s Cetaphil captured the loyalty of dermatologists, and prospered </li></ul>Source: Draws on research conducted at the Institute for Strategy and Competitiveness and interviews conducted with a former Neutrogena executive.
    34. 34. Overcoming Barriers to Strategy Capital Market Biases <ul><li>Strong pressure for short-term “surprises” in earnings or revenue </li></ul><ul><li>Strong pressure to grow faster than the industry </li></ul><ul><li>Industry-wide analyst metrics are misaligned with true value and drive strategic convergence </li></ul><ul><li>Strong pressures to emulate currently “successful” peers </li></ul><ul><li>A strong bias for “ doing deals ” (M&A) </li></ul><ul><li>Over-weighting of equity-based management compensation amplifies such unhealthy pressures </li></ul>
    35. 35. Integrating Strategy and Corporate Social Responsibility <ul><li>There is a long-term synergy between economic and social objectives </li></ul><ul><li>Company competitiveness and social conditions can both improve </li></ul><ul><li>Business cannot solve all of society’s problems, nor bear the cost of doing so </li></ul><ul><li>Business must approach its social agenda strategically </li></ul><ul><li>Where is a company able to have the greatest social impact ? </li></ul>
    36. 36. Strategic Positioning Whole Foods Markets <ul><li>Natural, fresh, organic, and prepared foods and health items with excellent service at premium prices </li></ul><ul><li>Educated, middle class, and affluent customers passionate about food as a part of a healthy lifestyle </li></ul><ul><li>Well-lit, inviting supermarket store formats with appealing displays and extensive prepared foods sections </li></ul><ul><li>Produce section as “theater” </li></ul><ul><li>Café-style seating areas with wireless internet for meetings and meals </li></ul><ul><li>Each store carries local produce and has the authority to contract with the local farmers </li></ul><ul><li>Information and education provided to shoppers along with products </li></ul><ul><li>High touch in-store customer service via knowledgeable, non-unionized, highly motivated personnel </li></ul><ul><li>Egalitarian compensation structure </li></ul><ul><li>Own seafood procurement and processing facilities to control quality (and price) from the boat to the counter </li></ul><ul><li>Donates 5% of profits to non-profits </li></ul><ul><li>Each store has “green projects,” directed by employees to improve environmental performance </li></ul>Value Proposition Distinctive Activities <ul><li>Excellent strategies often include a social dimension of the value proposition </li></ul>
    37. 37. Strategic CSR ChoicePoint <ul><li>ChoicePoint’s core business is providing personal identification , screening , and credit verification </li></ul><ul><ul><li>e.g., access to ChoicePoint databases, employment background screening, credit verification, DNA identification and authentication, drug testing, etc. </li></ul></ul><ul><li>The company’s CSR program focuses on providing services and advice to social organizations : </li></ul><ul><ul><li>e.g., Background checks of volunteers working with children such as Boys & Girls Club volunteers </li></ul></ul><ul><ul><li>Identity verification for Katrina victims </li></ul></ul><ul><ul><li>Assisting NGOs to find missing children and prevent identity theft </li></ul></ul><ul><li>ChoicePoint leverages its skills , data , technological knowledge , and staff to maximize social impact </li></ul><ul><li>Its CSR approach is aligned with ChoicePoint’s founding principle: creating a safer and more secure society through responsible use of information </li></ul><ul><li>CSR activities improve the company’s capabilities around identity issues </li></ul><ul><ul><li>Working with social organizations helps develop new methodologies and capabilities </li></ul></ul>
    38. 38. Strategic CSR Nestlé in India <ul><li>Nestlé’s entered the poor Moga region of India in 1962 </li></ul><ul><li>Local milk supply was hampered by small parcels of land, poor soil, periodic droughts, animal disease, and lack of a commercial market </li></ul><ul><li>Nestlé established local milk purchasing organizations in each town </li></ul><ul><li>Nestlé invested in improving competitive context </li></ul><ul><ul><li>Collection infrastructure such as refrigerated dairies was accompanied by veterinarians, nutritionists, agronomists, and quality assurance experts to assist small farmers </li></ul></ul><ul><ul><li>Medicines and nutritional supplements were provided to improve animal health </li></ul></ul><ul><ul><li>Monthly training sessions were held for local farmers </li></ul></ul><ul><ul><li>Wells to secure water supply for animals were dug with financing and technical assistance from Nestlé </li></ul></ul><ul><li>Nestlé has built a productive milk cluster in Moga, buying milk from more than 75,000 farmers through 650 local dairies </li></ul><ul><li>Moga has dramatically improved social conditions </li></ul><ul><li>Nestlé has developed a long-term competitive advantage in the milk cluster </li></ul>
    39. 39. Strategy <ul><li>A unique value proposition versus competitors </li></ul><ul><li>A different , tailored value chain </li></ul><ul><li>Clear tradeoffs, and choosing what not to do </li></ul><ul><li>Activities that fit together and reinforce each other </li></ul><ul><li>Continuity of strategy with continual improvement in realizing the strategy </li></ul>What Is a Strategy? What is Not a Strategy? <ul><li>Best practice improvement </li></ul><ul><li>Execution </li></ul><ul><li>Aspirations </li></ul><ul><li>A vision </li></ul><ul><li>Learning </li></ul><ul><li>Agility </li></ul><ul><li>Flexibility </li></ul><ul><li>Innovation </li></ul><ul><li>The Internet (or any technology) </li></ul><ul><li>Downsizing </li></ul><ul><li>Restructuring </li></ul><ul><li>Mergers / Consolidation </li></ul><ul><li>Alliances / Partnering </li></ul><ul><li>Outsourcing </li></ul><ul><li>Internationalizing </li></ul>
    40. 40. Communicating a Strategy <ul><li>Strategy involves everyone in an organization, not just top management </li></ul><ul><li>The benefits of strategy are greatest when it is communicated widely in the organization </li></ul><ul><li>Communicating strategy requires a simple and vivid way of describing the essence of the company’s unique position </li></ul><ul><ul><li>Symbols of the strategy are invaluable tools </li></ul></ul><ul><ul><li>Repetition </li></ul></ul><ul><li>The basic strategy and value proposition must also be communicated to customers, channels, suppliers, and financial markets </li></ul><ul><ul><li>What about confidentiality? </li></ul></ul><ul><li>Leaders should not assume that subordinates understand the strategy, or that they agree with it </li></ul><ul><ul><li>Help each organizational unit translate the strategy into implications for its own mandate </li></ul></ul><ul><li>Individuals who do not ultimately accept the strategy cannot have an ongoing role in the company </li></ul>
    41. 41. The Role of Leaders in Strategy <ul><li>Lead the process of choosing the company’s unique position </li></ul><ul><ul><li>The CEO is the chief strategist </li></ul></ul><ul><ul><li>The choice of strategy cannot be entirely democratic </li></ul></ul><ul><li>Clearly distinguish operational effectiveness improvement and strategy </li></ul><ul><li>Communicate the strategy relentlessly to all constituencies </li></ul><ul><ul><li>Harness the moral purpose of strategy </li></ul></ul><ul><li>Maintain discipline around the strategy, in the face of many distractions. </li></ul><ul><li>Decide which industry changes, technologies, and customer needs to respond to, and how the response can be tailored to the company’s strategy </li></ul><ul><li>Measure progress against the strategy using tailored metrics that capture the implications of the strategy for serving customers and performing particular activities </li></ul><ul><li>Sell the strategy and how to evaluate progress to the financial markets </li></ul><ul><li>Commitment to strategy is tested every day </li></ul>
    42. 42. The Moral Purpose of Business <ul><li>The most important thing a corporation can do for society is to contribute to a prosperous economy </li></ul><ul><li>Only business can create wealth ; other institutions in society are principally involved in redistributing wealth or investing it to meet human needs </li></ul><ul><li>Corporations are not responsible for all the world’s problems , nor do they have the resources to solve them all </li></ul><ul><ul><li>Business has no need to be defensive about its role in society </li></ul></ul><ul><li>Business has the tools, capabilities, and resources to make a far greater positive impact on social issues than most other institutions </li></ul><ul><li>Business is more transparent and more accountable than most foundations and NGOs </li></ul><ul><li>Each company can and should identify the particular set of societal problems that it is best equipped to help resolve, and from which it can gain the greatest competitive benefit </li></ul><ul><li>Addressing social issues through shared value strategies will lead to self-sustaining solutions </li></ul><ul><li>Using these principles, businesses can have a greater impact on social good than any other institution or philanthropic organization </li></ul>
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