Reinventing Strategy: the New Learning Porter Live...Winning Competitive Strategies Bangkok, Thailand July 11, 2005 This presentation draws on ideas from Professor Porter’s books
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Professor Michael E. PorterHarvard Business School
Winning Competitive StrategiesBangkok, Thailand
July 11, 2005This 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.
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
• 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
• Superior-engineered, high performance, sporty, customized automobiles at a premium price
• “Active driving” design philosophy
• Highly unique product and engine 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
Strategic PositioningBMW
Value PropositionValue PropositionValue Proposition Distinctive Activities
Distinctive Distinctive ActivitiesActivities
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
• 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 awhole 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.”
• 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
• Fast food chicken tailored to the tastes and preferences of the Central American customer at very low prices
• Fast food chicken tailored to the tastes and preferences of the Central American customer at very low prices
• Combination of traditional fast food model with some table service
• Heavy marketing and promotion – “An affordable treat for the whole family”– Frequent gimmicks and promotions,
targeting every member of the family– Strong civic pride and social awareness
• Engineering department studies motion to improve restaurant efficiency
• Emphasize high productivity in the labor force through incentives, education, and training
• Combination of traditional fast food model with some table service
• Heavy marketing and promotion – “An affordable treat for the whole family”– Frequent gimmicks and promotions,
targeting every member of the family– Strong civic pride and social awareness
• Engineering department studies motion to improve restaurant efficiency
• Emphasize high productivity in the labor force through incentives, education, and training
Strategic Positioning in Emerging EconomiesPollo Campero, Guatemala
Value PropositionValue PropositionValue Proposition Set of Activities
Set of Set of ActivitiesActivities
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
• The low price expands the market• Pollo Campero competes effectively against US fast food
companies through better understanding of local customer needs
•• The low price expands the marketThe 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 needscompanies through better understanding of local customer needs
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
• 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.
Set of Activities• Direct customer interaction through direct mail,
telephone, and the Internet• Sophisticated direct mail targeting low risk
households• 35+ year database and modeling utilities on
preferred drivers• Complex rating and pricing system• Heavy advertising to drive requests for rate
quotes (“I’ve got good news.”)• Quote rates to only 50% of customers who
inquire about coverage • 15-20% lower prices than competition• Network of insurance adjusters with cell phones
working out of own vehicles for immediate response
• 24-hour customer service to handle sales, policy inquires, and claims
• Conservative, liquid investment portfolio
Customer Group• High-risk drivers shunned by standard
automobile insurers
Set of Activities• Distribution through independent agents• Sales force that educates independent agents in
complex information gathering techniques• 30-year database on high-risk drivers• Complex rating scheme• 14,000 different prices• 50-300% premium pricing over standard
segment• Adjusters work from offices on wheels to provide
immediate response. Adjusters trained and empowered to write out check at scene of accident
• Steep incentives to make a 4% underwriting profit
• Conservative, liquid investment portfolio
Segmentation and Strategic PositioningAutomobile Insurance
Growing Strategically1. 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
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
Internationalization Strategy from Developing CountriesCEMEX
• Best practice improvement• Execution• Aspirations• A vision• Learning• Agility• Flexibility• Innovation• The Internet (or any technology)• Downsizing• Restructuring• Mergers / Consolidation• Alliances / Partnering• Outsourcing
• Best practice improvement• Execution• Aspirations• A vision• Learning• Agility• Flexibility• Innovation• The Internet (or any technology)• Downsizing• Restructuring• Mergers / Consolidation• Alliances / Partnering• Outsourcing
• A unique value propositionversus competitors
• A different, tailored value chain
• Clear tradeoffs, and choosing what not to do
• Activities that fit together and reinforce each other
• Continuity of position with continual improvement in realizing it
• A unique value propositionversus competitors
• A different, tailored value chain
• Clear tradeoffs, and choosing what not to do
• Activities that fit together and reinforce each other
• Continuity of position with continual improvement in realizing it
Source: Michael Raynor (2000), Real Organization for Real Options: The Limits of Established Corporate Contingency Theory and the Sources of Corporate Value Added in Hybrid Diversifiers . Doctoral Dissertation, Harvard Business School.
Re-focusing a Conglomerate in an Emerging Economy Empresas CAP, Chile
Source: Draws on research conducted by Professor Tarun Khanna at the Harvard Business School
Empresas CAP• Mining• Steel• Forestry• Fruits• Other Farm Products• Petroleum• Pension Management• Television Network• Life Insurance
CAP• Mining and Steel
TERRANOVA• Forestry
INVERCAP• Other businesses
Changes in the Chilean Business Environment• Liberalization of trade• Institutional equity investment increases dramatically• American Depositary Receipts became a viable financing
mechanism for Chilean firms• Surge of national and international analysts who cover the