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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
  • Competing to be the best: win/lose proposition A zero sum game can only be one “best” company Competing to be unique is a positive sum proposition
  • ROIC is the most important goal Utilization or capital Operators  capitalist ∏ (pi) > growth Many bad choices start here Easy to grow Goodwill amortization – extraordinary changes Pro-forma earnings can be misleading for decisions Disney Case Growth > Industry very hard to do forever Should be practical in setting profitability or growth targets
  • If holding periods are short Shareholder interests = company interests, are not the same Listen to much Must influence how shareholders measure the company Should select shareholders, not just inherit them
  • Will talk about focusing dynamism later
  • 3711 – Motor Vehicles Volvo 9.1% Toyota 8.8% Monaco Coach 26.9% Scania 19.4% Navistar 11.3% 3021 – Footwear (Rubber and Plastics) Nike 32.0% Saucony 17.4% Lacrosse 10.5%
  • Dividing the profit pool Threat of Substitutes What are the substitutes? Same function, different means “ do it yourself” air vs. bus Buyers Bargaining Power Leverage price sensitivity Industry Rivalry Intensity Basis of competition
  • Take existing structure as given Find a position of industry less exposed Threat of Substitute Products or Services ( + ) Bargaining Power of Suppliers ( -- ) Rivalry Among Existing Competitors ( -- ) Bargaining Power of Buyers ( -- ) Threat of New Entrants ( -- )
  • NOTE: need value proposition / Strategic Positioning slide for PACCAR Owner-operators Less clout Less price sensitive for truck itself Fleet, have own facilities Avoid “prestige” Avoid large buyers
  • Threat of Substitute Products or Services ( + / -- ) Bargaining Power of Suppliers ( -- ) Rivalry Among Existing Competitors ( -- --) Bargaining Power of Buyers ( 0 ) Threat of New Entrants ( -- )
  • How to improve ROIC Push in directions where it can be an advantage Another implication of industry structure: explaining industry change (see later)
  • Positioning Premium Price Value for customer Lower total costs of doing business Better progress against needs Lower costs Structural, enduring efficiency versus on time
  • Economic Model When doing this analysis, need a standard unit of output, ASM is the best for airlines Note on the data: Revenue and Cost per ASM is not a foolproof way to define airline price and cost levels, but it is probably the most generalizable because all airlines supply these figures. They do not, unfortunately, supply them with a consistent definition (I.e. operating revenue and total ASM are given, a footnote defines a figure as operating revenue divided by ASM, but the figure given does not match the definition). The metric may be biased against airlines with large freight businesses (which may explain the unstated adjustments, though UAL has the largest freight business and does not make adjustments to its figures), or airlines with more short-haul flights (though this describes Southwest, which does very well by these metrics). Major categories of operating expenses are, with % of operating expense for Southwest: Salaries, wages & benefits 31% Employee retirement plans 5% Fuel & Oil 17% Maintenance materials & repairs 8% Agency commissions 3% Aircraft rentals 4% Landing fees & other rentals 6% Depreciation 6% Other 19%
  • Price + cost advantage emanates from value chain
  • Activities at each of the stages in the value chain are included in the slide itself. Contracting phase : Legal and Risk Management are part of firm infrastructure, however they play a project specific role in the construction process (as opposed to company wide risk management or general legal counseling) Field Execution and Closing: players are the same, but their roles change fundamentally when moving to the closing phase as they need to ensure a smooth exit out of the site (e.g. transitioning subcontractors from one project to the next one without disruption and ensuring work is complete, finishing all documentation, cleaning the site, etc.)
  • How to achieve superior performance: two components Both are important Strategic position  about being different there is a gravitational pull toward operational effectiveness Unique value is generated in strategic positioning Operational Effectiveness is 95% of the job Hard to stay ahead Strategic Positioning  not because its better Risk (towards operational effectiveness)
  • Do you have a strategy? Now we talk about how to develop a good strategy Illustrate with interesting business examples; you’ll have to address in your own context if non-profit / government department
  • How conduct the business Choices about how to configure the value proposition
  • Note: In Europe, the proper Swedish pronunciation, ee-KAY-ah, is used throughout the region--not just in Sweden (e.g., in Germany, France, and elsewhere). What's interesting is that the American pronunciation, eye-KEY-ah, is the pronunciation they use in advertising here.
  • Gol Transportes Aéreos is a low-cost airline based in São Paulo, Brazil. Gol is the second largest airline in Brazil with 38.6% of the Brazilian domestic market and 12.2% of the international market of flights from and to Brazil as of September 2007. It owns Varig airline and operates a growing domestic and international scheduled network. Its main hubs are São Paulo's, Rio de Janeiro's and Brasília. On 24 June 2004 Gol launched simultaneous initial public offerings on the New York and São Paulo stock exchanges. It is now owned by AeroPar Participações (77%), Venture (17.6%) and American International Group (5.4%) and employs 5,456 staff (at March 2007). On March 28, 2007 Varig was officially purchased by Gol for US$320 million. Gol announced that Varig will continue to operate under its current name. The transaction, via its GTI subsidiary, requires a US$98 million cash payment, with the balance through the allocation of non-voting shares to Varig Logística and Volo which had acquired Varig in June 2006 for US$24 million. Gol Airlines started and is operated by company that owns one of the largest bus companies in Brazil Each year, over 130 million people use busses for interstate travel, while only 7 million fly - opportunity to substitute bus travel with low cost air travel 15% of Gol passengers are first time flyers Aircraft utilization rates are amongst highest in world Simple, no-frills service 80% reservations via the Internet Many flights during late night hours, taking advantage of cheaper runway access fees Single aircraft type lowers maintenance and service costs (cost structure is 25% less than competitors), translating into lower prices Quick turn-around at airports (24 minutes versus industry average of 45 minutes), no legacy routes, and low labor costs (110 employees/aircraft versus 160 industry average) allow for high aircraft utilization rates (up to 14 hours per day compared to industry average of 9 hours) Building on experience gained from operating one of Brazil’s largest bus companies Low price point (20% less than industry) allows for direct competition with equivalent bus routes
  • Stress tradeoffs whole foods Paccar Enterprise Can’t implement two different strategies at the same time
  • Ikea Value Proposition Young, space sensitive, or price sensitive buyers Low-priced, modular, ready-to-assemble designs No custom options Set of Activities Centralized, in-house design of all products Furniture design and manufacture driven by cost and style All styles on display in huge warehouse stores Large on-site inventories Extensive customer information to support self-selection Long hours of operation Child care provided in the store Principally self delivery by customers Typical Furniture Store Value Proposition Middle income customers Higher priced, fully assembled products Customization of fabrics, colors, finishes, and sizes Set of Activities Source some or all lines from outside suppliers Design and manufacturing driven by image, materials, varieties Medium sized showrooms with limited portion of available models on display Limited inventories / order with lead time Store sales personnel provide extensive product information and assistance Traditional retail hours No arrangements for children Store provides delivery
  • See at work at Progressive for use in diversification Science
  • Involves commitment Find robust/cost needs Expanding vs. contracting Dell case Make a bet
  • Best versus unique Through customer surveys  they ask for incompatible features/products that do not fit strategy
  • Tradeoffs
  • Connect CSR to the business Where are points of intersection: positive sum VERSUS Focus on friction
  • 65% of the merchandise is perishable goods compared to 50% for conventional retailers Gross margins average 7% above traditional grocery chains (34.7% v. 27.7% in 2004) Sales per square foot $700-800 compared to $350-450 for a conventional supermarket Customers are 7 times more like to come from households with $100K annual income than the national average Presence in 39 of 50 US metropolitan areas – only 3% territorial overlap with Wal-Mart Each store initiates its own green projects – 1/3 of all stores compost their waste Voluntary turnover of full-time employees is 22% Fortune 100 Best Company to work for 8 years in a row, 93% of options granted to non-executives Salary caps in place so that no executive makes more than 14 times the average salary of all full-time employees
  • ChoicePoint’s philanthropic mission is different from conventional corporate giving programs. Alignment with its founding principles: Creating a safer and more secure society through the responsible use of information Greatest capacity to benefit society lies in the information and technological skills that ChoicePoint is uniquely qualified to provide Seek out opportunities to impact society through technology and powerful data e.g., Ensuring volunteers who work with children are safe to helping locate missing children Focusing on non-profit organizations who serve vulnerable populations. supply tools and resources that reduce risk and protect clients with the goal of a safer, more secure society Launched VolunteerSelect, which provides qualified nonprofits with affordable access to comprehensive public record and proprietary databases for the screening of volunteers and employees Donates millions of dollars in free/deeply discounted background screening services to nonprofits Provided technology to assure that Katrina refugees were resettled into host communities smoothly and safely. Verification identification services were provided to evacuees so that they could quickly receive benefits. Relief workers found hospitals, shelters and food supplies using specialized data and mapping services ChoiePoint works with two big NGOs: 1) The National Center for Missing & Exploited Children; and 2) financial support and assistance to the NGO: Identify Theft Resource Center (committed $1 million over 4 years in 2005)
  • Milk production has increased fifty fold and the death rate of calves has dropped by three quarters Able to pay higher prices Ninety percent of the homes have electricity and nearly all have telephones All villages have primary schools, and many have secondary schools Moga has five times the number of doctors as its neighboring regions Nestlé now has competitors in the Moga cluster Nestlé went beyond what was necessary in the near term No contributions to charity or NGOs In this case, the lines between CSR, strategy, and business operations blur
  • Alignment Front line More just for top management Basic strategy and value propositions should also be communicated to competitors
  • Success in financial markets is a measure of how strategy has progressed (and how well strategy has been sold) Otherwise, outsiders will define the strategy
  • Download the Michael Porter's presentation in PPT format!

    1. 1. Professor Michael E. Porter Harvard Business School Bucharest, Romania November 30, 2007 On Strategy and Leadership 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, . 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. Vision Statements Autodesk Transforming business by design Avon To be the company that best understands and satisfies the product, service and self-fulfillment needs of women – globally. Goodyear Tire and Rubber Become a market-focused tire company providing superior products and services to end-users and to our channel partners, leading to superior returns for our shareholders. Lafarge To be the undisputed world leader in building materials Marriott International, Inc. To be the number one lodging company in the world.
    5. 5. 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>
    6. 6. 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>
    7. 7. 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>
    8. 8. 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%
    9. 9. 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%
    10. 10. 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
    11. 11. 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>
    12. 12. 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>
    13. 13. 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>
    14. 14. 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>
    15. 15. Determinants of Relative Performance Differentiation (Higher Price) Lower Cost Competitive Advantage
    16. 16. 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
    17. 17. 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
    18. 18. Defining the Value Chain Commercial Construction Firm Infrastructure (Strategic Planning, Finance, Control, Administration, Legal, Safety, Risk Management) Human Resource Management (HR, Training, Recruiting) Technology Development (Information Technology, Business Systems) M a Support Activities Source: Interviews with Suffolk managers Note: Risk Management and Legal department are part of the firm infrastructure, but they also play a role specific to each project during the contracting phase <ul><ul><li>There can be different ways of configuring the value chain in the same industry </li></ul></ul><ul><li>Client </li></ul><ul><li>Development </li></ul><ul><li>Marketing </li></ul><ul><li>Business development </li></ul><ul><li>Client relationship management </li></ul><ul><li>Pipeline management </li></ul><ul><li>Bidding and </li></ul><ul><li>Selection </li></ul><ul><li>Bidding </li></ul><ul><li>Project risk assessment </li></ul><ul><li>Securing insurance coverage </li></ul><ul><li>Pre- </li></ul><ul><li>Construction </li></ul><ul><li>Obtaining permits and licenses </li></ul><ul><li>Site preparation </li></ul><ul><li>Estimation of pricing, materials, and schedule </li></ul><ul><li>Advanced ordering of materials </li></ul><ul><li>Subcontractor contracting </li></ul><ul><li>Construction </li></ul><ul><li>Management </li></ul><ul><li>Managing the client interface </li></ul><ul><li>Architect and engineering coordination </li></ul><ul><li>Site management </li></ul><ul><li>Coordinating logistics </li></ul><ul><li>Updating documentation </li></ul><ul><li>Project </li></ul><ul><li>Closeout </li></ul><ul><li>Site cleanup </li></ul><ul><li>Manage subcontractors’ transition out of the site </li></ul><ul><li>Preparing final documentation </li></ul><ul><li>Client satisfaction survey </li></ul>r g i n <ul><li>After- </li></ul><ul><li>Completion </li></ul><ul><li>Support </li></ul><ul><li>Ongoing customer support </li></ul><ul><li>Warranties </li></ul>Procurement (Materials, Subcontractors, Services) Primary Activities
    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 GOL Airlines, Brazil <ul><li>Convenient, no-frills airline service between 41 Brazilian and nearby international cities at very low prices competing with bus transportation </li></ul><ul><li>Price sensitive business (60%) and leisure travelers </li></ul><ul><li>No-frills service </li></ul><ul><li>Many flights during late night hours </li></ul><ul><li>On time performance </li></ul><ul><li>Quick airport turn-around </li></ul><ul><li>Utilize aircraft more hours per day </li></ul><ul><li>Single aircraft type (Boeing 737s) </li></ul><ul><li>80% reservations made via the Internet </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>Extensive customer information but limited sales support </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 Management 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. 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>
    35. 35. 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>
    36. 36. 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>
    37. 37. 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>
    38. 38. 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>
    39. 39. The Process of Developing Business Unit Strategy <ul><li>Strategy should be developed and periodically reviewed in a formal process rather than being left to occur spontaneously </li></ul><ul><ul><li>The process need not be highly structured </li></ul></ul><ul><li>Strategy development is best done in a multifunctional team including the general manager and heads of important functions </li></ul><ul><li>The role of the strategic planning executive or department is to serve as staff to the team, not be responsible for strategy development </li></ul><ul><li>The strategy team itself should be relatively small to ensure frank and productive discussion between the leader and senior peers </li></ul><ul><ul><li>Strategy development involves making tradeoffs and exploring options that can be unsettling and disruptive if lower level people are involved </li></ul></ul><ul><ul><li>Other managers can be invited for particular meetings/input </li></ul></ul><ul><li>The strategy team should conduct its work jointly rather than delegating components of the strategy to functional areas </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>