Reinventing Strategy: the New Learning

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Reinventing Strategy: the New Learning

  1. 1. Reinventing Strategy: the New Learning Professor Michael E. Porter Harvard Business School Winning Competitive Strategies Bangkok, Thailand July 11, 2005 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. Copyright 2005 © Professor Michael E. Porter
  2. 2. Agenda • The Economic Foundations of Competition • Principles of Strategy • Developing a Strategy • Strategy for Diversified Business Groups 20050711 Thailand – Final 07062005 -NV.ppt 2 Copyright 2005 © Professor Michael E. Porter
  3. 3. How Managers Think About Competition COMPETING TO BE THE COMPETING TO BE THE COMPETING TO BE COMPETING TO BE BEST BEST UNIQUE UNIQUE • The worst error in strategy is to compete with rivals on the same dimensions 20050711 Thailand – Final 07062005 -NV.ppt 3 Copyright 2005 © Professor Michael E. Porter
  4. 4. Flawed Concepts of Strategy • Strategy as aspiration – “Our strategy is to be #1 or #2…” • Strategy as action – “Our strategy is to merge…” – “Internationalize…” – “Consolidate the industry…” – “Outsource…” • Strategy as what is important – “Technology strategy, customer strategy…” • Strategy as vision • Strategy as learning – “Our strategy is to learn and change” 20050711 Thailand – Final 07062005 -NV.ppt 4 Copyright 2005 © Professor Michael E. Porter
  5. 5. Setting the Right Goals • The fundamental goal of a company is superior long-term return on investment • Growth is good only if superiority of ROIC is achieved and maintained • Goals and metrics besides ROIC (e.g. size; market share; revenue growth; eps growth; return on sales; ebitda margin; pro-forma earnings; cash flow) are risky for strategy • Profitability must be measured realistically, capturing the true profits on the full investment • Prevalent accounting adjustments to reported profitability can obscure true economic performance and lead to bad competitive choices – The risks of write-offs, impairment charges, and ignoring amortization 20050711 Thailand – Final 07062005 -NV.ppt 5 Copyright 2005 © Professor Michael E. Porter
  6. 6. Economic Performance versus Shareholder Value Economic Economic Shareholder Value Shareholder Value Performance Performance • ROIC • Stock Price • Revenue Growth • EPS • EPS Growth • Shareholder value is the result of creating real economic value • Pleasing today’s shareholders is not the goal 20050711 Thailand – Final 07062005 -NV.ppt 6 Copyright 2005 © Professor Michael E. Porter
  7. 7. Economic Foundations of Competition Causes of Profitability • The fundamental unit of strategic analysis is the industry - Defining the relevant industry is essential to strategy • Company economic performance results from two distinct causes: Relative Position Relative Position Industry Industry Within the Within the Structure Structure Industry Industry - Overall Rules of Competition - Sources of Competitive Advantage • Strategy must encompass both 20050711 Thailand – Final 07062005 -NV.ppt 7 Copyright 2005 © Professor Michael E. Porter
  8. 8. Economic Foundations of Competition The Basic Economics of Strategy 30% 25% Return on 20% 19.55% Invested Capital 1985-2002 15% 12.75% 10% 5% 0% Pharmacia & Upjohn* Southwest Airlines Source: Compustat Note: ROIC calculated as EBIT divided by Average Invested Capital (Total Assets less Excess Cash less Current Operating Liabilities) * Prior to 1995, reflects Pharmacia only. Company was acquired in 2000 by Monsanto, which then changed its name to Pharmacia 20050711 Thailand – Final 07062005 -NV.ppt 8 Copyright 2005 © Professor Michael E. Porter
  9. 9. Economic Foundations of Competition - Continued The Basic Economics of Strategy 30% 28.14% 25% Return on 20% Invested 19.55% Capital 1985-2002 15% 12.75% 10% 5% 5.05% 0% Pharmacia & Upjohn* Southwest Airlines Industry Average Source: Compustat Note: ROIC calculated as EBIT divided by Average Invested Capital (Total Assets less Excess Cash less Current Operating Liabilities) * Prior to 1995, reflects Pharmacia only. Company was acquired in 2000 by Monsanto, which then changed its name to Pharmacia 20050711 Thailand – Final 07062005 -NV.ppt 9 Copyright 2005 © Professor Michael E. Porter
  10. 10. Profitability of Selected U.S. Industries Prepackaged Software Pharmaceuticals Semiconductors Electromedical Apparatus Groceries and Related Products - Wholesale Restaurants Surgical/Medical Instruments Computer Programming & Data Processing Homebuilding Telephone Communications Petroleum Refining Motor Vehicles Trucking Motor Vehicle Parts & Accessory Radio, TV Broadcast, & Comm Equipment Hotels & Motels Natural Gas Distribution Catalog & Mail-Order Houses Average ROIC in the Cable & Other Pay TV Services U.S. Economy: 11.6% Steel Works & Blast Furnaces Airlines 0% 5% 10% 15% 20% 25% 30% 35% Return on Invested Capital, Average of 1985 – 2002 Note: ROIC calculated as EBIT divided by Average Invested Capital (Total Assets less Excess Cash less Current Operating Liabilities) Source: Compustat and author’s calculations 20050711 Thailand – Final 07062005 -NV.ppt 10 Copyright 2005 © Professor Michael E. Porter
  11. 11. Drivers of Long-Term Industry Profitability Threat of Substitute Products or Services Bargaining Power Rivalry Among Bargaining Power of Suppliers Existing of Buyers Competitors Threat of New Entrants 20050711 Thailand – Final 07062005 -NV.ppt 11 Copyright 2005 © Professor Michael E. Porter
  12. 12. Addressing Industry Structure Buyer Power • Find the attractive customers – Large, “leading” customers tend to attract the most competition and be the most demanding • Grow alternative channels – Nurture and support alternative channels that bypass powerful intermediaries or cultivate new customer groups • Create end user pull – Temper the power of the immediate customer by appealing directly to the end consumer • Be different, not better – Strategic positioning to increase unique value to the customer 20050711 Thailand – Final 07062005 -NV.ppt 12 Copyright 2005 © Professor Michael E. Porter
  13. 13. Shaping Industry Structure Foodservice Distribution Threat of Substitute Products or Services • Expand value-added services • Offer private label products Rivalry Among Bargaining Power Bargaining Power of Suppliers Existing of Buyers Competitors • National procurement • Expand value-added contracts • Expand value added services services • Offer private label products • Offer private label products Threat of New Entrants • Increase investment in sophisticated IT and national marketing • Offer private label products 20050711 Thailand – Final 07062005 -NV.ppt 13 Copyright 2005 © Professor Michael E. Porter
  14. 14. Determinants of Relative Performance Differentiation (Higher Price) Competitive Competitive Advantage Advantage Lower Cost 20050711 Thailand – Final 07062005 -NV.ppt 14 Copyright 2005 © Professor Michael E. Porter
  15. 15. Strategic Economic Model Southwest Airlines Revenue and Cost per Available Seat Mile, Average of 1998 - 2000 12 Operating Profit per Pricing 10 Available Seat Mile Differential: 1.72 Cost Advantage: 8 2.44 Cents per ASM 6 Operating Cost per Available Seat Mile 4 2 0 Southwest Airline Industry Average Note: ASM (Available Seat Miles) defined as total seats available multiplied by miles flown Source: Airline annual reports and author’s calculations 20050711 Thailand – Final 07062005 -NV.ppt 15 Copyright 2005 © Professor Michael E. Porter
  16. 16. Sources of Competitive Advantage Activities and the Value Chain Firm Infrastructure (e.g. Financing, Planning, Investor Relations) Human Resource Management Support (e.g. Recruiting, Training, Compensation System) Activities Technology Development (e.g. Product Design, Testing, Process Design, Material Research, Market Research) M Value Procurement a (e.g. Components, Machinery, Advertising, Services) r What g buyers are Inbound Operations Outbound Marketing After-Sales i willing to Logistics Logistics & Sales Service pay n (e.g. Incoming (e.g. Assembly, (e.g. Order (e.g. Sales (e.g. Installation, Material Component Processing, Force, Customer Storage, Data Fabrication, Warehousing, Promotion, Support, Collection, Branch Report Advertising, Complaint Service, Operations) Preparation) Proposal Resolution, Customer Writing, Web Repair) Access) site) Primary Activities • When they compete in a business, companies perform a set of discrete activities, in which competitive advantage resides 20050711 Thailand – Final 07062005 -NV.ppt 16 Copyright 2005 © Professor Michael E. Porter
  17. 17. Identifying the Value Chain Homebuilding Firm Infrastructure (e.g. Financing, Planning, Investor Relations) Human Resource Management Support (e.g. Recruiting, Training, Compensation System) Activities Technology Development (e.g. Product Design, Testing, Process Design, Materials Research, Market Research) M Value Procurement a (e.g. Materials, Subcontracted Labor, Advertising, Services) r What g buyers are Land Acquisition Construction Marketing Closing After-Sales i willing to & Development & Sales Service pay n (Identify attractive (Design, (Lead generation, (e.g. Customer (e.g. Warranties, Engineering, Model home Financing, Customer markets, Secure Schedule and display, Sales Contract, Title, Complaints) land, Procure manage force, Customer Closing) entitlements and construction selection of permits, Prepare process) personalized site) options) Primary Activities 20050711 Thailand – Final 07062005 -NV.ppt 17 Copyright 2005 © Professor Michael E. Porter
  18. 18. Commanding a Premium Price • A premium price comes from creating buyer value (higher willingness to pay): – Lowering the buyer’s overall cost of doing business – Allowing the buyer to enhance (non-price) value with its customers – Increasing end user satisfaction – Buyer value will vary by customer / customer group • Buyer value is created by discrete activities a firm performs • Buyers cannot always perceive the non-price value a firm creates – “Signals of value” may be necessary to communicate the value created • Creating higher value often requires extra costs – Differentiators should only add cost where it contributes to value Buyer Value and Financial Performance • The division of value with the customer depends on the customer’s bargaining power • Differentiation is profitable if the price premium exceeds the extra costs of creating it 20050711 Thailand – Final 07062005 -NV.ppt 18 Copyright 2005 © Professor Michael E. Porter
  19. 19. Cost Advantage • Cost is created by performing discrete activities • Total cost must be disaggregated to the activity level • Cost leadership usually involves cost advantages in many activities • The relative cost of an activity is driven by a number of cost drivers – Scale – Pattern of capacity – Fit (linkages with other – Cumulative experience utilization activities) – Timing of asset – Integration vs. – Sharing across purchase outsourcing businesses – Institutional factors (e.g. – Location of the activity – Policy choices regulation, unionization) • Cost advantage often requires spending more on some activities • Cost advantage is enhanced by mutually reinforcing choices in several activities (fit) • Sustained cost leadership is accompanied by a supporting culture / values Cost and Financial Performance • Cost advantage is profitable if it exceeds any price discount offered to secure adequate volume 20050711 Thailand – Final 07062005 -NV.ppt 19 Copyright 2005 © Professor Michael E. Porter
  20. 20. Agenda • The Economic Foundations of Competition • Principles of Strategy • Developing a Strategy • Strategy for Diversified Business Groups 20050711 Thailand – Final 07062005 -NV.ppt 20 Copyright 2005 © Professor Michael E. Porter
  21. 21. Achieving Superior Performance Operational Effectiveness is Not Strategy Operational Strategic Effectiveness Positioning • Assimilating, attaining, and • Creating a unique and extending best practices sustainable competitive position Run the same race faster Choose to run a different race 20050711 Thailand – Final 07062005 -NV.ppt 21 Copyright 2005 © Professor Michael E. Porter
  22. 22. Five Tests of a Good Strategy Overview • A unique value proposition • A unique value proposition compared to competitors compared to competitors • A different, tailored value chain • A different, tailored value chain • Clear tradeoffs, and choosing what • Clear tradeoffs, and choosing what not to do not to do • Activities that fit together and • Activities that fit together and reinforce each other reinforce each other • Continuity of position with • Continuity of position with continual improvement in realizing continual improvement in realizing it it 20050711 Thailand – Final 07062005 -NV.ppt 22 Copyright 2005 © Professor Michael E. Porter
  23. 23. Strategic Positioning Enterprise Rent-A-Car Distinctive Distinctive Value Proposition Value Proposition Activities Activities • Home-city replacement cars to drivers • Numerous, small, inexpensive offices, including whose cars are being repaired or who need on-premises offices at major accounts an extra vehicle, at low rates (30% below • Open during daylight hours airport rates) • Delivers cars to customers’ homes or rental sites, or customers to cars • Acquire new and older cars, favoring soon-to-be discontinued older models • Keep cars six months longer than other major rental companies • In-house reservations • Grassroots marketing with limited television • Cultivate strong relationships with auto dealerships, body shops, and insurance adjusters • Hire extroverted college graduates to encourage community interaction and customer service • Employ a highly sophisticated computer network to track its fleet 20050711 Thailand – Final 07062005 -NV.ppt 23 Copyright 2005 © Professor Michael E. Porter
  24. 24. Defining the Value Proposition What What Which Which Customers? Customers? Needs? Needs? • What end users? • Which products? • What channels? • Which features? • Which services? What Relative What Relative Price? Price? 20050711 Thailand – Final 07062005 -NV.ppt 24 Copyright 2005 © Professor Michael E. Porter
  25. 25. Strategic Positioning BMW Distinctive Distinctive Value Proposition Value Proposition Activities Activities • Superior-engineered, high performance, • “Active driving” design philosophy sporty, customized automobiles at a • Highly unique product and engine premium price performance • Centralized engineering • Design department with high degree of autonomy to encourage creativity • Factories configured for customization • High craft labor input in production with selective automation • High vertical integration to achieve proprietary components • One global brand • Limited dealer system • Non-traditional, brand-focused marketing • BMW-sponsored race team Source: Draws on research conducted by Harvard Business School students M. Collardin, F. Cueto, J. Encinar, A. Gonzalez, A. Kulyk, and D. Smith, April 1997 20050711 Thailand – Final 07062005 -NV.ppt 25 Copyright 2005 © Professor Michael E. Porter
  26. 26. Creating Supply and Demand Curves Universal Stainless Price B Margin Price, Cost Strategy B Price A Strategy A Volume 20050711 Thailand – Final 07062005 -NV.ppt 26 Copyright 2005 © Professor Michael E. Porter
  27. 27. Recent Thinking on the Sustainability of Competitive Advantage ••“There are no sustainable competitive “There are no sustainable competitive advantages anymore” advantages anymore” ••“Any strategy can be imitated” “Any strategy can be imitated” 20050711 Thailand – Final 07062005 -NV.ppt 27 Copyright 2005 © Professor Michael E. Porter
  28. 28. Making Strategic Tradeoffs • Tradeoffs occur when strategic positions are incompatible – the need for choice Sources of Tradeoffs – Incompatible product / service features or attributes – Differences in the best configuration of activities in the value chain to deliver the chosen value proposition – Inconsistencies in image or reputation across positions – Limits on internal coordination, measurement, motivation, and control • Tradeoffs make a strategy sustainable against imitation by established rivals • An essential part of strategy is choosing what not to do 20050711 Thailand – Final 07062005 -NV.ppt 28 Copyright 2005 © Professor Michael E. Porter
  29. 29. Strategic Tradeoffs Neutrogena Soap (1990) • Forgo cleaning, skin softening, and deodorizing features • Choose higher costs through the configuration of: – packaging – manufacturing – detailing – medical advertising – skin research • Give up the ability to reach customers via: – promotions – television – some distribution channels 20050711 Thailand – Final 07062005 -NV.ppt 29 Copyright 2005 © Professor Michael E. Porter
  30. 30. Strategic Tradeoffs US Home Improvement Industry Home Depot Home Depot Lowe’ Lowe’s Lowe’s Value Proposition Value Proposition • Predominately male, experienced customers • Female shoppers and casual and contractors do-it-yourselfers • Building material, home improvement, • Extensive home decor, appliance, kitchen, and lawn & garden products and lawn & garden offerings Set of Activities Set of Activities • Appealing store layout • No-frills, warehouse design - Wider aisles, brighter lighting, lower ceilings - Merchandise stored in large racks and - “Stores-in-the-store” featuring fully-equipped stacked on the floor kitchen & bath studios, lighting displays, etc. • Contractors serviced by separate corporate • All customers (including contractors) serviced division with different yards out of same stores • Hub-and-spoke distribution with just-in-time • Bulk deliveries of products directly from delivery usually after hours vendors usually during the day • Every-day low prices without volume • Every-day low prices with volume discounts discounts 20050711 Thailand – Final 07062005 -NV.ppt 30 Copyright 2005 © Professor Michael E. Porter
  31. 31. Evolution of Customer Management Thinking • Be close to your customer • Customer intimacy • Customer retention • Customer relationship management • Delight your customer 20050711 Thailand – Final 07062005 -NV.ppt 31 Copyright 2005 © Professor Michael E. Porter
  32. 32. Recent Thinking on the Sources of Competitive Advantage ••“Key” Success Factors “Key” Success Factors ••“Core” Competencies “Core” Competencies ••“Critical” Resources “Critical” Resources • Competitive advantage is seen as concentrated in a few parts of the value chain 20050711 Thailand – Final 07062005 -NV.ppt 32 Copyright 2005 © Professor Michael E. Porter
  33. 33. Southwest Airlines Mutually Reinforcing Activities No No meals baggage Limited transfers Passenger No connections No seat Service with other assignments airlines Limited use of travel agents Short-haul, point- Frequent, 15-Minute to-point routes Standardized Reliable Gate Turns fleet of 737 between medium- Departures sized cities and aircraft secondary airports Automatic Ticketing Machines Lean, Highly Flexible Productive Very Low union Ticket Prices Ground and Gate contracts Crews “Southwest, High the low-fare High Aircraft airline” employee Utilization stock ownership 20050711 Thailand – Final 07062005 -NV.ppt 33 Copyright 2005 © Professor Michael E. Porter
  34. 34. Mutually Reinforcing Activities Word-of- Word-of- Zara Cutting- Cutting - mouth edge fashion marketing at moderate and repeat price and buying Widely quality popular styles Customers chic but Very cost- Global Little media frequent team of conscious advertising product trend- changes spotters Advanced Production production Extensive in Europe machinery use of store sales data Tight Prime store coordination locations in Very JIT delivery with 20 high traffic flexible wholly-owned areas factories production system • Fit is about leveraging what is different to be more different Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS 20050711 Thailand – Final 07062005 -NV.ppt 34 Copyright 2005 © Professor Michael E. Porter
  35. 35. Why Are Good Strategies Not Imitated? Dell • Question “What is it about the direct sales model and mass customization that has been difficult for competitors to replicate?” • Answer “It’s not as simple as just having a direct sales force. It’s not as simple as just having mass customization in plant or manufacturing methodology. It’s a whole series of things in the value chain from the way we procure, the way we develop product, the way we order and have inventory levels, and manufacturer and service support. The entire value chain has to work together to make it efficient and effective.” Kevin Rollins, Vice Chairman Source: Forbes ASAP, April 5, 1999 20050711 Thailand – Final 07062005 -NV.ppt 35 Copyright 2005 © Professor Michael E. Porter
  36. 36. Continuity of Strategy • Continuity of strategy is fundamental to sustainable competitive advantage – e.g., allowing an organization to understand the strategy – building truly unique skills and assets related to the strategy – establishing a clear identity with customers, channels, and other outside entities – strengthening fit across the value chain • Reinvention and frequent shifts in direction are costly and confuse the customer, the industry, and the organization • Continuity is essential to the company’s basic value proposition, but successful companies continuously improve in how they realize their strategy – Strategic continuity and continuous change should occur simultaneously. They are not inconsistent • Continuity of strategy allows learning and change to be faster and more effective 20050711 Thailand – Final 07062005 -NV.ppt 36 Copyright 2005 © Professor Michael E. Porter
  37. 37. Strategic Positioning in Emerging Economies Pollo Campero, Guatemala Set of Set of Value Proposition Value Proposition Activities Activities •• Fast food chicken tailored to the tastes and Fast food chicken tailored to the tastes and •• Combination of traditional fast food model Combination of traditional fast food model preferences of the Central American preferences of the Central American with some table service with some table service customer at very low prices customer at very low prices •• Heavy marketing and promotion Heavy marketing and promotion – “An affordable treat for the whole family” – “An affordable treat for the whole family” – Frequent gimmicks and promotions, – Frequent gimmicks and promotions, targeting every member of the family targeting every member of the family – Strong civic pride and social awareness – Strong civic pride and social awareness •• Engineering department studies motion to Engineering department studies motion to improve restaurant efficiency improve restaurant efficiency •• Emphasize high productivity in the labor force Emphasize high productivity in the labor force through incentives, education, and training through incentives, education, and training • The low price expands the market • The low price expands the market • Pollo Campero competes effectively against US fast food • Pollo Campero competes effectively against US fast food companies through better understanding of local customer needs companies through better understanding of local customer needs Source: Draws on research conducted by Harvard Business School students M. Collardin, F. Cueto, J. Encinar, A. Gonzalez, A. Kulyk, and D. Smith, April 1997 20050711 Thailand – Final 07062005 -NV.ppt 37 Copyright 2005 © Professor Michael E. Porter
  38. 38. Typical Strategic Errors in Emerging Economies • Imitating the offerings of foreign and other domestic competitors • Price as the primary basis of competition • Wide product lines that serve all local customer segments 20050711 Thailand – Final 07062005 -NV.ppt 38 Copyright 2005 © Professor Michael E. Porter
  39. 39. Barriers to Strategy Flawed Concepts • Misunderstanding of strategy itself Industry Pressures • Industry conventional wisdom leads all companies to follow common practices • Labor agreements limit ways of configuring activities • Regulation constrains price, product, service or process alternatives • Customers ask for incompatible features or request new products or services that do not fit the strategy 20050711 Thailand – Final 07062005 -NV.ppt 39 Copyright 2005 © Professor Michael E. Porter
  40. 40. Barriers to Strategy Capital Market Biases • Strong pressures to emulate the currently “successful” peers • Growth expectations are rewarded at the expense of sustained profitability • There is a strong bias to “do deals” (M&A) Internal Practices • Inappropriate goals and performance metrics • Rapid turnover of leadership encourages compromises of the strategy to achieve short-term performance benefits • Inappropriate cost allocation is used to justify adding new products, services, or customers • Pursuit of generic best practices (e.g. IT systems) standardizes processes and makes them less distinctive • Outsourcing makes activities homogenous and blurs distinctiveness • Risk aversion and over-decentralization work against clear tradeoffs • A desire for consensus leads to blurring instead of clear strategic choices • Over-weighting of equity-based compensation amplifies unhealthy stock market pressures 20050711 Thailand – Final 07062005 -NV.ppt 40 Copyright 2005 © Professor Michael E. Porter
  41. 41. Barriers to Strategy Neutrogena Soap (2005) • Prior to the 1990’s Neutrogena was the number one brand recommended by dermatologists • Neutrogena had a relatively narrow target market but deep penetration and high customer loyalty • Beginning in the early- to mid-1990’s, new growth-oriented management shifted Neutrogena from a dermatologist-focused marketing concept to mass market television advertisements and celebrity endorsements • Neutrogena lost market share while Gallderma’s Cetaphil captured the loyalty of dermatologists, and prospered Source: Draws on research conducted at the Institute for Strategy and Competitiveness and interviews conducted with a former Neutrogena executive. 20050711 Thailand – Final 07062005 -NV.ppt 41 Copyright 2005 © Professor Michael E. Porter
  42. 42. Agenda • The Economic Foundations of Competition • Principles of Strategy • Developing a Strategy • Strategy for Diversified Business Groups 20050711 Thailand – Final 07062005 -NV.ppt 42 Copyright 2005 © Professor Michael E. Porter
  43. 43. Strategy for What? Defining the Right Business: Products Product A Product B Product C Product D Product E Threat of Substitute Firm Infrastructure Products or (e.g. Financing, Planning, Investor Relations) Services Human Resource Management Support (e.g. Recruiting, Training, Compensation System) Activities Technology Development (e.g. Product Design, Testing, Process Design, Material Research, Market Research) M Value Procurement a Bargaining Rivalry Among Bargaining (e.g. Components, Machinery, Advertising, Services) What r Power Existing Power buyers Competitors g of Suppliers of Buyers are Inbound Operations Outbound Marketing After-Sales i Logistics Logistics & Sales Service willing to (e.g. n pay Incoming (e.g. (e.g. Order (e.g. Sales (e.g. Material Assembly, Processing, Force, Installation, Storage, Component Warehousing Promotion, Customer Data Fabrication , Report Advertisin Support, Collection, , Branch Preparation) g, Complaint Threat of New Service, Operations Proposal Resolution, Entrants Customer ) Writing, Repair) Access) Web site) Primary Activities 20050711 Thailand – Final 07062005 -NV.ppt 43 Copyright 2005 © Professor Michael E. Porter
  44. 44. Defining the Right Business Foodservice Distribution Broadline Distribution Systems Distribution • Customers are independent restaurants • Customers are national chains and institutions • The product line consists of well over • The product line consists of several 10,000 SKUs hundred SKUs • Sales and service activities are carried • Customer relationships and services out by local sales reps are specified by national contracts • Value-added services, credit terms, and • Price is the key basis for selection; distributors’ private-label products are customers do not purchase value- valued and allow support product/service added services or private-label differentiation products • Logistical activities are heavily local in • A national distribution and nature (local warehouses and trucks) warehousing network is required 20050711 Thailand – Final 07062005 -NV.ppt 44 Copyright 2005 © Professor Michael E. Porter
  45. 45. Strategy for What? Defining the Right Business: Geography Cross- Cross- Local Local Regional Regional National National Global Global National National • Separate local • Integrated global value chains value chain Ability to Leverage Key Activities Across Geography Firm Infrastructure (e.g. Financing, Planning, Investor Relations) Human Resource Management Support (e.g. Recruiting, Training, Compensation System) Activities Technology Development (e.g. Product Design, Testing, Process Design, Material Research , Market Research) M Value Procurement a (e.g. Components, Machinery, Advertising, Services) r What g buyers are Inbound Operations Outbound Marketing After-Sales willing to i Logistics Logistics & Sales Service pay n (e.g. Incoming (e.g. Assembly, (e.g. Order (e.g. Sales (e.g. Installation, Material Component Processing, Force, Customer Storage, Data Fabrication, Warehousing, Promotion, Support, Collection, Branch Report Advertising, Complaint Service, Operations) Preparation) Proposal Resolution, Customer Writing, Web Repair) Access) site) Primary Activities 20050711 Thailand – Final 07062005 -NV.ppt 45 Copyright 2005 © Professor Michael E. Porter
  46. 46. Revealing a Strategy • History – Understand the unique position that the company may have occupied in the past – Can it be updated with new technology and delivery mechanisms? • Results – Measure sales by customer type / product type – Understand product line / customer profitability – What is the strategy that explains the areas of superior profitability? 20050711 Thailand – Final 07062005 -NV.ppt 46 Copyright 2005 © Professor Michael E. Porter
  47. 47. Creating a Strategy Strategic Segmentation Tradeoffs • Creatively segmenting product • Finding tradeoffs in the value varieties, customer groups, and proposition or in the value chain purchase occasions Unique Activities Industry Dynamics • Building off activities with true • Identifying strategic positions opened uniqueness up by industry changes • Looking for new activity configurations and combinations • Migrate toward the chosen strategic position • Focus incremental investments on reinforcing the chosen position 20050711 Thailand – Final 07062005 -NV.ppt 47 Copyright 2005 © Professor Michael E. Porter
  48. 48. Segmentation and Strategic Positioning Automobile Insurance Progressive Progressive Geico Geico Customer Group Customer Group • High-risk drivers shunned by standard • “Preferred”, lowest risk drivers automobile insurers Set of Activities Set of Activities • Distribution through independent agents • Direct customer interaction through direct mail, telephone, and the Internet • Sales force that educates independent agents in complex information gathering techniques • Sophisticated direct mail targeting low risk households • 30-year database on high-risk drivers • 35+ year database and modeling utilities on • Complex rating scheme preferred drivers • 14,000 different prices • Complex rating and pricing system • 50-300% premium pricing over standard • Heavy advertising to drive requests for rate segment quotes (“I’ve got good news.”) • Adjusters work from offices on wheels to provide • Quote rates to only 50% of customers who immediate response. Adjusters trained and inquire about coverage empowered to write out check at scene of accident • 15-20% lower prices than competition • Steep incentives to make a 4% underwriting • Network of insurance adjusters with cell phones profit working out of own vehicles for immediate response • Conservative, liquid investment portfolio • 24-hour customer service to handle sales, policy inquires, and claims • Conservative, liquid investment portfolio 20050711 Thailand – Final 07062005 -NV.ppt 48 Copyright 2005 © Professor Michael E. Porter
  49. 49. Segmentation and Strategic Positioning Enterprise Rent-A-Car Distinctive Distinctive Value Proposition Value Proposition Activities Activities • Home-city replacement cars to drivers • Ubiquitous, small, inexpensive offices, including whose cars are being repaired or who need on-premises offices at major accounts an extra vehicle, at low rental rates (30% • Open during daylight hours below airport rates) • Delivers cars to customers’ homes or rental sites, or customers to cars • Acquire new and older cars, favoring soon-to-be discontinued older models • Keep cars six months longer than other major rental companies • In-house reservations • Grassroots marketing with limited television • Cultivate strong relationships with auto dealerships, body shops, and insurance adjusters • Hire extroverted college graduates to encourage community interaction and customer service • Employ a highly sophisticated computer network to track its fleet 20050711 Thailand – Final 07062005 -NV.ppt 49 Copyright 2005 © Professor Michael E. Porter
  50. 50. Growing Strategically 1. Make the strategy even more distinctive - Introduce new technologies, features, products or services that are tailored to the strategy and which leverage other distinctive activities within the value chain 2. Deepen the strategic position rather than broaden it – Raise the penetration of chosen customers / needs 3. Expand geographically to tap new regions or countries using the same positioning – Aggressively reposition foreign acquisitions around the company’s strategy 4. Expand the market for what the company can uniquely deliver – Find other customers and segments that would most value the strategy • It is an illusion that growth (and especially profitability) are easier to achieve in untapped or growth segments • It is difficult, and often dangerous, to try to grow faster than the underlying market for an extended period. • Industry leaders should concentrate as much, or more, on growing the category as on growing share • In many cases, the appropriate goal is to earn a high return and pay dividends 20050711 Thailand – Final 07062005 -NV.ppt 50 Copyright 2005 © Professor Michael E. Porter
  51. 51. Internationalization Strategy from Developing Countries General Principles • Internationalize first in product lines or customer segments where the company has the most unique advantages - The most important advantages will come from distinctive products, processes, and services - Some product advantages may come from tailoring to lower income, developing country, or regional needs - Labor costs or resource advantages are rarely sustainable • Gain direct access to foreign markets as soon as practical rather than rely solely on intermediaries 20050711 Thailand – Final 07062005 -NV.ppt 51 Copyright 2005 © Professor Michael E. Porter
  52. 52. Internationalization Strategy from Developing Countries General Principles - continued • Prioritize markets to enter - Similar needs and segments - Expatriates - e.g., Zee TV with Indian programming; Pollo Campero in fast food - Over time, learn from sophisticated and demanding foreign customers • Use alliances selectively - Use alliances as transitional strategies, not as permanent solutions - Ensure that alliances do not block the company’s ability to gain competitive advantage and damage its own capabilities • Locate manufacturing facilities from a regional perspective - Consolidate operations for greater efficiency and scale • Source inputs from the lowest cost locations, not only the home country 20050711 Thailand – Final 07062005 -NV.ppt 52 Copyright 2005 © Professor Michael E. Porter
  53. 53. Internationalization Strategy from Developing Countries CEMEX Cemex Strategy • The market leader in Mexico with 60% of the country’s total installed capacity • Produces commodity products as well as products tailored to the Mexican market • Aggressive investments in process technology and IT Internationalization Concept • Acquire controlling stakes in the largest producers in emerging countries • Target investments would have plants located close to ports to allow opportunities for exporting excess capacity • Migrate products and technologies from Mexico to new countries Country Selection • Country should have large population, high population growth, and relatively low level of current consumption • Cemex should be able to control at least 25% of the market • There are other potentially attractive countries for Cemex in the region Company Selection • Cemex could obtain a controlling stake • Potential for restructuring the target company and its local industry 20050711 Thailand – Final 07062005 -NV.ppt 53 Copyright 2005 © Professor Michael E. Porter
  54. 54. The Process of Developing a Strategy • Strategy should be developed and periodically reviewed in a formal process rather than being left to occur spontaneously – The process need not be highly structured • Strategy development is best done in a multifunctional team including the general manager and heads of important functions • The role of strategic planning executive or department is to serve as staff to the team, not the entity responsible for strategy • The strategy team itself should be relatively small to ensure frank and productive discussion among the leader and senior peers – Strategy development involves tradeoffs and the exploration of options which can be misunderstood or unsettling if a large group is involved – Other managers can be invited for particular meetings / topics • The strategy team should conduct its work jointly rather than delegating components of the strategy to functional areas 20050711 Thailand – Final 07062005 -NV.ppt 54 Copyright 2005 © Professor Michael E. Porter
  55. 55. Communicating a Strategy • Strategy involves everyone in an organization, not just management • The benefits of strategy are greatest when it is communicated widely in the organization • The basic strategy and value proposition must also be communicated to customers, channels, suppliers, and financial markets – What about confidentiality? • Managers should not assume that subordinates understand the strategy or that they agree with it – A series of open, two way discussions is necessary to increase understanding and buy-in • Individuals who do not ultimately accept the strategy cannot have an ongoing role in the company 20050711 Thailand – Final 07062005 -NV.ppt 55 Copyright 2005 © Professor Michael E. Porter
  56. 56. Measuring a Strategy Levels of Metrics Profitability (Relative ROIC, Growth) Strategic Economics (Relative price, relative cost) Value Proposition (e.g. Penetration rate of chosen customers, satisfaction measures of chosen needs, relative product performance along chosen attributes) Activity Distinctiveness (e.g. Relative performance levels of distinct activities (e.g. relative quality, service, and cost at the activity level) Operational/Best Practice Metrics 20050711 Thailand – Final 07062005 -NV.ppt 56 Copyright 2005 © Professor Michael E. Porter
  57. 57. The Role of Leaders in Strategy • Clearly distinguish operational effectiveness from strategy • Lead the process of choosing the company’s unique position – The choice of strategy cannot be entirely democratic • Communicate the strategy relentlessly to all constituencies • Maintain discipline around the strategy, in the face of many distractions. • Decide which industry changes, technologies, and customer needs to respond to, and how the response can be tailored to the company’s strategy • Measure progress against the strategy using metrics that capture the implications of the strategy on multiple levels • Sell the strategy and how to measure progress to financial markets • Commitment to strategy is tested every day 20050711 Thailand – Final 07062005 -NV.ppt 57 Copyright 2005 © Professor Michael E. Porter
  58. 58. Strategy What Is a Strategy? What is Not a Strategy? • A unique value proposition • A unique value proposition • • Best practice improvement Best practice improvement versus competitors versus competitors • • Execution Execution • • Aspirations Aspirations • A different, tailored value chain • A different, tailored value chain • • A vision A vision • • Learning Learning • Clear tradeoffs, and choosing • Clear tradeoffs, and choosing • • Agility Agility what not to do what not to do • • Flexibility Flexibility • • Innovation Innovation • Activities that fit together and • Activities that fit together and • • The Internet (or any technology) The Internet (or any technology) reinforce each other reinforce each other • Downsizing • Downsizing • • Restructuring Restructuring • Continuity of position with • Continuity of position with • • Mergers // Consolidation Mergers Consolidation continual improvement in realizing continual improvement in realizing • • Alliances // Partnering Alliances Partnering it it • • Outsourcing Outsourcing 20050711 Thailand – Final 07062005 -NV.ppt 58 Copyright 2005 © Professor Michael E. Porter
  59. 59. Agenda • The Economic Foundations of Competition • Principles of Strategy • Developing a Strategy • Strategy for Diversified Business Groups 20050711 Thailand – Final 07062005 -NV.ppt 59 Copyright 2005 © Professor Michael E. Porter

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