20091130 M. Porter 2009

1 Copyright 2009 © Professor Michael E. Porter20091130 – Peru (Strategy).ppt

Professor Michael E. PorterHarvard Business School

Lima, Peru

November 30, 2009This 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 On Competition (Harvard Business Review, 2008). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: Nov. 25, 2009

Strategic Thinking: Implications for Peruvian Companies


Thinking Strategically

COMPETING TO BE THE COMPETING TO BE THE BESTBEST

COMPETING TO BE THE COMPETING TO BE THE BESTBEST

COMPETING TO BE COMPETING TO BE UNIQUEUNIQUE

COMPETING TO BE COMPETING TO BE UNIQUEUNIQUE

• The worst error in strategy is to compete with rivals on the same dimensions


Understanding the Concept of Strategy

• Strategy is more than a particular set of actions– “Our strategy is to merge…”– “… internationalize…”– “… consolidate the industry…”– “… outsource…”– “…double our R&D budget…”

• Strategy is different than aspirations– “Our strategy is to be #1 or #2…”– “Our strategy is to grow…”– “Our strategy is to be the world leader…”– “Our strategy is to provide superior returns to our shareholders…”

• Strategy is not the same as vision– “Our strategy is to best understand and satisfy our customers’ needs…”– “… provide superior products and services…”– “…to advance technology for mankind…”

• Strategy defines the company’s distinctive approach to competing and the competitive advantages on which it will be based


Setting the Right Goals

• Strategic thinking starts with setting proper financial goals for the company

• The fundamental goal of a company is superior long-term return on investment

• Growth is good only if superiority in ROIC is achieved and sustained

– ROIC threshold

• Setting unrealistic profitability or growth targets can undermine strategy


Shareholder Value Is Not The Goal

Superior Economic Superior Economic PerformancePerformance

Superior Economic Superior Economic PerformancePerformance Shareholder ValueShareholder ValueShareholder ValueShareholder Value

• Sustained ROIC and Growth

• Stock Price

• Shareholder value is the result of creating real economic value

• Pleasing today’s shareholders is not the goal


• The company’s overall mix of businesses and the integration of business unit strategies

Multiple Levels of Strategy Should Drive Competitive Advantage

Competitive or Competitive or Business StrategyBusiness Strategy Competitive or Competitive or

Business StrategyBusiness Strategy

• How to compete in each distinct business or industry

Corporate or Portfolio StrategyCorporate or Portfolio StrategyCorporate or Portfolio StrategyCorporate or Portfolio Strategy


Economic Foundations of Competition

IndustryIndustryStructureStructureIndustryIndustryStructureStructure

Relative Position Relative Position Within the Within the

IndustryIndustry

Relative Position Relative Position Within the Within the

IndustryIndustry

- Overall Rules of Competition - Sources of Competitive Advantage

• The basic unit of strategic analysis is the industry

– Defining the relevant businesses and business units (product scope / geographic scope) is essential to good strategy

• Economic performance results from two distinct causes

• Strategic thinking must encompass both


Disaggregating Economic Performance: Industry vs. Position

0%

5%

10%

15%

20%

25%

30%

35%

Revlon Paccar

Return on Invested Capital

1993-2007

13.6%

31.6%

27.8%

Industry Average

10.5%

Note: Excess cash is calculated by subtracting cash in excess of 10% of annual revenue.Source: Compustat (2008), author’s analysis

ROIC = Earnings before interest and taxes

divided by invested capital less excess cash


Fundamentals of Industry Structure

• Part of the strategy agenda is to drive improvements in industry structure

Threat of SubstituteProducts or Services

Threat of New Entrants

Rivalry AmongExisting

Competitors

Bargaining Powerof Suppliers

Bargaining Powerof Buyers


Reshaping Industry Competition

Zero Sum Zero Sum CompetitionCompetitionZero Sum Zero Sum

CompetitionCompetitionPositive Sum Positive Sum CompetitionCompetition

Positive Sum Positive Sum CompetitionCompetition

• Compete head to head

• One company’s gain requires another company’s loss

• Competition undermines industry profitability

• Compete on strategy

• More than one company can be successful

• Competition expands the value pool


Positioning and Industry StructureHeavy Trucks

• Large independent suppliers of engines and drive train components

• Unionized labor

Bargaining Power Bargaining Power of Suppliersof Suppliers

Bargaining Power Bargaining Power of Suppliersof Suppliers


Competitors


Competitors



Threat of New Threat of New EntrantsEntrants

Threat of New Threat of New EntrantsEntrants

Threat of SubstituteThreat of SubstituteProducts or Products or

ServicesServices

Threat of SubstituteThreat of SubstituteProducts or Products or

ServicesServices

• Many truck producers are assemblers

• Heavy price competition on standardized models

• Large fleets• Leasing companies• Small fleets and owner

operators

• Railroads• Water transportation


Paccar Strategic Positioning

• Focus on owner-operators

• Design trucks with special features and amenities

• Customization and build-to-order

• Design for low truck operating costs

• Offer extensive roadside assistance to truckers

• Premium price

• Different customers / different basis of competing


Strategic PositioningEconomic Fundamentals

Differentiation(Higher Price)

Lower Cost

CompetitiveAdvantage

CompetitiveAdvantage


• Strategy is reflected in how activities in the value chain are configured and linked together

Foundations of Competitive AdvantageConfiguring the Value Chain

SupportActivities

Marketing& Sales

(e.g. Sales Force,

Promotion, Advertising,

Proposal Writing, Web

site)

InboundLogistics

(e.g. Incoming Material

Storage, Data Collection,

Service, Customer Access)

Operations

(e.g. Assembly, Component Fabrication,

Branch Operations)

OutboundLogistics

(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

• Competing in any business involves performing a set of discrete activities, in which competitive advantage resides


• Creating a unique competitive position

• Assimilating, attaining, and extending best practices

OperationalOperationalEffectivenessEffectiveness

StrategicStrategicPositioningPositioning

Achieving Superior PerformanceOperational Effectiveness is Not Strategy

Do the same thing better Do things differently to meet different needs


Five Tests of an Excellent Strategy

• A unique value proposition

• A different, tailored value chain

• Clear tradeoffs, and choosing what not to do

• Activities in the value chain that fit together and reinforce each other

• Strategic continuity with continual improvement in realizing the strategy





• Strategic continuity with continual improvement in realizing the strategy


Defining the Value Proposition

What Relative What Relative Price?Price?

What Relative What Relative Price?Price?

What What Customers?Customers?

What What Customers?Customers?

Which Which Needs?Needs?Which Which

Needs?Needs?

• What end users?

• What channels?

• Which products?

• Which features?

• Which services?

• Unique value propositions often expand the market

• Premium? Discount?


Strategic PositioningIKEA, Sweden

• Young, first time, or price-sensitive buyers

• Stylish, space efficient and scalable furniture and accessories at very low price points.

• Modular, ready-to-assemble, easy to package designs

• In-house design of all products

• Wide range of styles displayed in huge warehouse stores with large on-site inventories

• Self-selection

• Extensive customer information in the form of catalogs, explanatory ticketing, do-it-yourself videos, and assembly instructions

• Ikea designer names attached to related products to inform coordinated purchases

• Long hours of operation

• Suburban locations with large parking lots

• On-site, low-cost, restaurants

• Child care provided in the store

• Self-delivery by most customers

Distinctive Distinctive ActivitiesActivities

Distinctive Distinctive ActivitiesActivitiesValue PropositionValue PropositionValue PropositionValue Proposition


Strategic PositioningNespresso

• Uniquely high quality, easy to prepare

• Espresso coffee targeted at convenience- sensitive consumers at a premium price

• Extra-high quality ground coffee in 16+ varieties

• Individually proportioned capsules for freshness and ease of use

• Tailored espresso machines manufactured by high-end machine vendors

• Capsules sold only online or through about 200 coffee boutique shops in major cities, not in mass market channels

• Nespresso Club to achieve high levels of communication with customers

• Focused image-oriented media advertising

Distinctive Distinctive ActivitiesActivities

Distinctive Distinctive ActivitiesActivitiesValue PropositionValue PropositionValue PropositionValue Proposition


Five Tests of an Excellent Strategy





• Strategic continuity with continual improvement in realization


Making Clear Strategic Tradeoffs

• Tradeoffs exist where strategic positions are incompatible

Strategic Tradeoffs

– Incompatible product or service features or attributes

– Differences in the value chain deliver a chosen value proposition

– Inconsistencies in image or reputation between strategic positions

– Limits in organizational capacity to implement multiple ways of competing simultaneously

• Tradeoffs make a strategy hard for competitors to imitate

• An essential part of strategy is choosing what not to do


Product• Higher priced, fully assembled products

• Customization of fabrics, colors, finishes, and sizes

• Design driven by image, materials, varieties

Value Chain• Source some or all lines from outside

suppliers• Medium sized showrooms with limited

portion of available models on display• Limited inventories / order with lead time• Extensive sales assistance

• Traditional retail hours

Strategic TradeoffsIKEA, Sweden

Product• Low-priced, modular, ready-to-assemble

designs • No custom options

• Furniture design driven by cost, manufacturing simplicity, and style

Value Chain• Centralized, in-house design of all products

• All styles on display in huge warehouse stores

• Large on-site inventories• Limited sales help, but extensive customer

information• Long hours of operation

IKEAIKEAIKEAIKEA Typical Furniture RetailerTypical Furniture RetailerTypical Furniture RetailerTypical Furniture Retailer


Typical Thinking on the Sources of Competitive Advantage

• “Key” Success Factors

• “Core” Competencies

• “Critical” Resources

• “Key” Success Factors

• “Core” Competencies

• “Critical” Resources

• Competitive advantage is seen as concentrated in a few parts of the value chain

• Successful strategies create numerous advantages, not a few


Integrating the Value Chain Zara Apparel

Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS

Wide range of

styles

Customers Customers chic but chic but

cost-cost-consciousconscious

• Strategic fit comes from leveraging what is different to be more different

Tight coordination

with 20 wholly-owned

factories

JIT delivery

Little media advertising

Word-of-Word-of-mouth mouth

marketing marketing and repeat and repeat

buyingbuying

Global team of trend-

spotters

Advanced production machinery

Cutting- Cutting- edge fashion edge fashion at moderate at moderate

price and price and qualityquality

Prime store Prime store locations in locations in high traffic high traffic

areasareas

Extensive use of store sales data

Majority of productio

n in Europe

Very Very flexible flexible

production production systemsystem

Very Very frequent frequent product product changeschanges


Strategic Continuity

• Continuity of strategy is a precondition for sustainable competitive advantage– e.g., Understanding the strategy

– Building truly unique skills and assets

– Establishing a clear identity

– Strengthening fit across the value system

• Reinvention and frequent shifts in direction are costly and confuse the customer, the industry, and the organization

• Strategic continuity requires an enduring value proposition while continuously improving ways to realize it– Strategic continuity and continuous change should occur simultaneously

– Continuity of strategy allows learning and change to be faster and more effective


Growing Strategically

1. Make the strategy even more distinctive

2. Deepen the strategic position with target customers (rather than broaden it)

3. Expand geographically to tap new regions or countries using the same positioning

4. Expand the market for what the company can uniquely deliver

• It is an illusion that growth in new, unserved segments is profitable

• It is dangerous to attempt to grow faster than the underlying market for an extended period.

• Industry leaders should concentrate as much, or more, on growing the industry as on growing market share


Strategic Thinking at Peruvian Companies

• Low Price

• Share of Market

• Product / Product Features

• Export Uniform Products

• Superior Value

• Unique Position

• Customer Experience• Total Customer Support

• Locally-Tailored Regional and Global Strategy


• The company’s overall mix of businesses and the integration of business unit strategies

Multiple Levels of Strategy Should Drive Competitive Advantage

Competitive or Competitive or Business StrategyBusiness Strategy Competitive or Competitive or

Business StrategyBusiness Strategy

• How to compete in each distinct business or industry

Corporate or Portfolio StrategyCorporate or Portfolio StrategyCorporate or Portfolio StrategyCorporate or Portfolio Strategy


Premises of Corporate Diversification

• Overall corporate size per se is irrelevant for economic value

• Competition occurs at the business level

• Being part of a diversified company involves inevitable costs for business units

• Corporate strategy must produce a clear and offsetting benefit to the competitive advantage of business units which exceeds alternative governance structures (e.g. alliances)

• Shareholders can diversify directly at lower cost

• The central issue in corporate strategy is how the corporation adds competitive value to its businesses


Emerging CountryBusiness Groups

CarDealership

CarDealership

FinancialServices

FinancialServices

SugarSugarSugarSugar

AirlineAirline

HotelHotelHotelHotel

Real EstateReal EstateServicesServices

Real EstateReal EstateServicesServices

ComputerComputerWholesalerWholesaler

ComputerComputerWholesalerWholesaler

GroceryGroceryStoresStores

GroceryGroceryStoresStores

Fast FoodFast FoodFranchisesFranchises

Fast FoodFast FoodFranchisesFranchises

IndustrialParts

IndustrialParts

Imports/ Imports/ DistributionDistribution

Imports/ Imports/ DistributionDistribution

FoodFoodProcessingProcessing

FoodFoodProcessingProcessing

TobaccoTobacco

TextilesTextilesTextilesTextiles

Miramax

HollywoodPictures

RadioStations

ResortHotels

RealEstate

Develop-ment

TelevisionProgram-

ming DisneyChannel

Motion Picture

Distribution

FamilyMotion

Pictures

AnimatedFeature Films

DirectMarketing

RetailStores

ConsumerProducts

Disney Records

SportsTeam Multi-

mediaProductions

Broadway Productions

Broadway Theater

HollywoodRecords

TelevisionNetwork

AdultCable

Channels

Traveling Shows

Television

Stations

TimeSharing

Touchstone

YouthBooks and

EducationalMaterials

HyperionBooks

DiscoverMagazine

Mickey’sKitchen*

CruiseLine

ThemeParks

AdultPublishing / Newspapers

Diversified Companies in Advanced Economies

Walt Disney

Diversification in Emerging Economies


Ma

rg

i

n

M

arg

i

n

Creating Corporate Value Added

• Successful companies capture interrelationships across the value chains of business units

– Transferring proprietary knowledge and skills across units

– Sharing activities across business unit value chains• Sharing corporate overhead is not enough


Obstacles to Strategic Thinking

• Misunderstanding strategy principles

• Industry conventional wisdom leads all companies to follow common practices

• Customers ask for incompatible features or request new products or services that do not fit the strategy

• Inappropriate goals and performance metrics bias strategy choices

• A desire for consensus blurs strategic tradeoffs

• Short term pressure to please shareholders


• Drive operational improvement, but establish a clear strategy

• Communicate the strategy relentlessly to all constituencies

• Measure progress against the strategy using tailored metrics tied to the company’s position

• Maintain discipline around the strategy, in the face of many distractions.– Commitment to strategy is tested every day

• Tailor responses to market trend to the strategy

• Sell the strategy and how to evaluate progress against the strategy to the financial markets

The Role of Leaders in Strategy


Corporate Social Responsibility A Growing Agenda

• External pressures for CSR continue to grow• Numerous outside parties are monitoring, ranking, and reporting

social performance• The legal, business and reputation risks are great for companies

engaging in practices deemed unacceptable

YET

• Few companies have integrated society into strategy in a way that reinforces competitive advantage for the business

AND

• Concern with social issues will be a defining characteristic of the post-crisis era


• There is an inevitable link between business and society• A healthy business depends on a healthy community to create

demand for its products and provide a supportive business environment

• A healthy society depends on competitive companies that can create jobs, support high wages, build wealth, buy local goods, and pay taxes

• There is a long-term synergy between economic and social objectives

Integrating Company and Community

Social Development

CompanyCompetitiveness


Competitiveness and Social Issues

Company Productivity

Energy Use

Water Use

Employee Health

Gender Equity

Worker Safety

Worker Education and

SkillsPoverty in the Company’sCommunities

EnvironmentalImpact


The Concept of Shared Value

• Find and expand the points of convergence between economic and social objectives

– These points of convergence are growing

• Achieve shared value through understanding new needs, new technologies, and new approaches to management

• Shared value opportunities are even greater in developing countries

• Shared value thinking applies equally to NGOs and governments

Shared Value: Policies and practices that enhance the competitiveness of a company while simultaneously advancing economic and social conditions in the communities in which it operates


Creating Shared Value Nestlé

Nutrition

Water Rural Development


Creating Shared ValueNespresso

• Reconfigure the value chain– Reconceiving coffee procurement

• Upgrade the coffee cluster in each sourcing region

• Take concerted action: partnering with stakeholders

Shared Value

Farmers• Better prices• Better yields• Better processing

Community• Environmental

sustainability• Economic

development

Nespresso• Better quality• Stable supply• Reinforces

strategy


Energy efficient vehicles

Ecoimagination

Enabling the market for investments in renewable energy and climate change

Strategy and SocietyOther Case Studies

• Toyota

• General Electric

• Swiss Re


The Moral Purpose of Business

• The most important thing a corporation can do for society is to contribute to a prosperous economy

– Business has no need to be defensive about its role

• However, corporations depend on a healthy society to sustain competitiveness

• Companies have the tools, capabilities, and resources to have a major impact on social issues

• Each company should identify the particular set of societal problems that it is best equipped to help resolve, and from which will arise the greatest long term synergy with its business

• Addressing these issues using the principles of shared value will lead to self-sustaining solutions

• Businesses are invaluable strategic partners for NGO’s, government and other institutions to achieve society’s most cherished aims


Strategy in Economic Downturns

• Create a positive agenda

• Refocus on strategy

• Return to economic fundamentals

• Downsize to a strategy, not across the board

• Do not overreact to distressed industry conditions

• Use the downturn to get things done that would be more difficult in normal times

• Position for long term economic performance, not near term stock price

• Seize opportunities for discontinuities which are more likely to emerge

• Strategy is more important in downturns, not less

Documents

20091130 M. Porter 2009