Strategic Positioning

31
Creating Shared Value: Strategy in the Post-Crisis Era P f Mi h lEP t Professor Michael E. Porter Harvard Business School Madrid ExpoManagement June 16, 2010 This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Ad t (Th F P 198 ) “Wh i S ?” (H d B i R i N /D 1996) “S d h I (H d B i 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: June 15, 2010

Transcript of Strategic Positioning

Page 1: Strategic Positioning

Creating Shared Value: Strategy in the Post-Crisis Era

P f Mi h l E P tProfessor Michael E. PorterHarvard Business SchoolMadrid ExpoManagement

June 16, 2010This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); CompetitiveAd t (Th F P 198 ) “Wh i S ?” (H d B i R i N /D 1996) “S d h I ” (H d B i

1 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt

Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard BusinessReview, 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: June 15, 2010

Page 2: Strategic Positioning

Thinking Strategically

COMPETING TO BE THECOMPETING TO BE THECOMPETING TO BE THE COMPETING TO BE THE BESTBEST COMPETING TO BE UNIQUECOMPETING TO BE UNIQUE

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

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Setting the Right Financial Goals

• Strategic thinking starts with setting proper financial goals for the• 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– ROIC threshold

• Setting unrealistic profitability or growth targets can undermine strategygy

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Economic Performance versus Shareholder Value

Economic Economic PerformancePerformance Shareholder ValueShareholder ValuePerformancePerformance

• Sustained ROIC

• Sustainable Revenue Growth

• Stock Price

• EPS MultipleGrowth • EPS Growth

• Shareholder value is the result of creating real economic value

• Pleasing today’s shareholders is not the goal

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• Pleasing today s shareholders is not the goal

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Determinants of Superior Performance

Differentiation(Higher Price)

C titiC titiCompetitiveAdvantage

CompetitiveAdvantage

Lower Cost

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Competitive Advantage and the Value Chain

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

SupportActivities

MTechnology Development

(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

Human Resource Management(e.g. Recruiting, Training, Compensation System)

Value

MarketingInbound Operations Outbound After-Sales

arg

i

Procurement(e.g. Components, Machinery, Advertising, Services)

Value

What buyers are willing to pay

Marketing& Sales

(e.g. Sales Force,

Promotion,

InboundLogistics

(e.g. Incoming Material

Storage, Data

Operations

(e.g. Assembly, Component Fabrication,

OutboundLogistics

(e.g. Order Processing,

Warehousing,

After Sales Service

(e.g. Installation, Customer Support,

i

n

,Advertising,

Proposal Writing, Web

site)

g ,Collection, Service,

Customer Access)

Branch Operations)

g,Report

Preparation)

pp ,Complaint Resolution,

Repair)

• All competitive advantage resides in the value chain. Strategy is

Primary Activities

6 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt

p g gymanifested in how activities in the value chain are configured and linked together

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Achieving Superior PerformanceOperational Effectiveness is Not StrategyOperational Effectiveness is Not Strategy

OperationalOperationalEffectivenessEffectiveness

StrategicStrategicPositioningPositioning

• Creating a unique and sustainable competitive position

• Assimilating, attaining, and extending best practices

position

Do the same thing better Do things differently to achieve a different purpose

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Five Tests of a Strategy

• A unique value propositiond t th i ticompared to other organizations

• A different, tailored value chain

• Clear tradeoffs, and choosing what not to do

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

• Strategic continuity with continual• Strategic continuity with continual improvement in realization

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Strategic PositioningIKEA, Sweden

Distinctive Distinctive ActivitiesActivitiesValue PropositionValue Proposition

• 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 inventoriesstores with large on-site inventories• Self-selection• Extensive customer information in the form of catalogs,

explanatory ticketing, do-it-yourself videos, and assembly instructionsy

• 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

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Page 10: Strategic Positioning

Defining the Value Proposition

Wh tWh tWhat What Customers?Customers? Which Needs?Which Needs?

• What end users?

• What channels?

• Which products?

• Which features?

• Which services?

What Relative What Relative Price?Price?

• Premium? Discount?

• A novel value proposition often expands the market

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Page 11: Strategic Positioning

Strategic PositioningNespresso

Distinctive Distinctive ActivitiesActivitiesValue PropositionValue Proposition

• Uniquely high quality, easy to prepare espresso coffee at a premium price

Demanding con enience sensiti e

• Extra-high quality ground coffee in 16+ varieties

• Individually proportioned capsules for• Demanding, convenience-sensitive, affluent consumers and offices

Individually proportioned capsules for freshness and ease of use

• Tailored espresso machines manufactured to specifications by high-end machine vendors

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

• Uses the Nespresso Club to achieve high levels of communication with customers

• Focused image-oriented mediaFocused image oriented media advertising

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Five Tests of a Strategy

• A unique value propositiond t th i ticompared to other organizations

• A different, tailored value chain

• Clear tradeoffs, and choosing what not to do

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

• Strategic continuity with continual• Strategic continuity with continual improvement in realization

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Page 13: Strategic Positioning

Strategic TradeoffsIKEA, Sweden

ProductProduct

IKEAIKEA Typical Furniture RetailerTypical Furniture Retailer

Product• Higher priced, fully assembled products

• Customization of fabrics, colors, finishes, and sizes

Product• Low-priced, modular, ready-to-assemble designs • No custom options

• Furniture design driven by cost, manufacturing • Design driven by image, materials, varieties

Value Chain

g y , gsimplicity, and style

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

• 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

, g p

• All styles on display in huge warehouse stores

• Large on-site inventories• Extensive sales assistance

• Traditional retail hours

g• Limited sales help, but extensive customer

information• Long hours of operation

13 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt

Page 14: Strategic Positioning

Mutually Reinforcing ActivitiesIkea Explanatory

catalogs, Suburbaninformative

displays and labels

Suburban locations with ample parking

More

High traffic store layout

Instructions

Self delivery and assembly

by most t

Limited Sales Staffing

impulse buying

Self-selection by

customer

and support for customer assembly

customersAmple

inventory on site

customer

Increased likelihood of Complete line of Ease of

t t d

Year round

Designer identification of

compatible lines

likelihood of follow-on purchase

pfurniture and

accessories to furnish home

transport and assembly

Year-round stocking to even out

production

In-house design focused

on cost of manufacturing

Modular, scalable Low

100 percent sourcing from

long term‘Knock-down’ kit packaging

scalable furniture designs

manufacturing cost

High variety, but ease of

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long-term suppliers

kit packagingmanufacturing

• Fit is leveraging what is different to be more different

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Strategic Continuity

• Continuity of strategy is fundamental to sustainable competitive advantage– e.g., allows the organization to understand the strategy– build truly unique skills and assets related to the strategy– establish a clear identity with customers, channels, and other outside entities– strengthen fit across the value chain

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

M i t i ti it i th l iti• Maintain continuity in the value proposition

• Continuously improve ways to realize the value propositionSt t i ti it d ti h h ld i lt l Th t– 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

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

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Growing Social Challenges

• External pressures for corporate social responsibility continue to growMany companies are engaged in an unprecedented range of CSR• Many companies are engaged in an unprecedented range of CSR activities

• While the legitimacy of business continues to erode• Most companies treat CSR and community issues as separate from

their core business agenda• Company practice in CSR leaves much room for improvement• Company practice in CSR leaves much room for improvement

– Unfocused– Reactive

– Limited impact– Hard to sustain

– PR-driven• Yet concern with social issues will be a defining characteristic of the

post-crisis era

– Hard to sustain

post-crisis era

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The Boundaries of Capitalism

S i l dC Social and Economic

Development

Company Profitability and

Growth

• Narrow cost minimization

• Ease of outsourcing, relocating, and globalizing

• Shortening time horizons

• Tradeoff mindset

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Sources of Competitive Advantage: New Learning

Worker

EmployeeEducation and SkillsPoverty in

C Worker Safetya Company’s

Community

Company P d ti it

Gender EnvironmentalProductivity EquityImpact

Energy Use Employee Health

Water Use

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• Social deficits create economic cost• External conditions shape company productivity

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The Concept of Shared Value

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

Fi d d d th b t i d i t l bj ti• Find and expand the congruence between economic and societal objectives, rather than assume tradeoffs or the need for redistribution

– Driven by value creation thinking

• Shared value arises from a deeper understanding of the drivers of competitiveness and competitive advantage

The opportunities are growing– The opportunities are growing

• Achieving shared value requires new operating practices, new technologies and new approaches to competing

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technologies, and new approaches to competing

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Shared Value vs. CSR

CSR CSV

• Values: doing good • Value: economic and social benefits

• Philanthropy

• Selfless

relative to cost

• Joint value creation

• Mutual benefits for the company

• Discretionary

• Agenda externally determined

p y

• Integral to competing

• Company specific / internally generated

• Separate from profit maximization

• Limited (CSR) budget

generated

• Integral to profit maximization

• Total budget

Example

• Fair trade

Example

• Transforming procurement to increase quality and yield

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increase quality and yield

• In either case, compliance with regulations and good corporate practice is assumed.

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Levels of Shared Value

• Reconfigure the value chain using shared value to drive productivity

• Create products that meet social needs

• Build clusters and a supportive local external context to enhance ppproductivity and create self-reinforcing economic development

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Page 22: Strategic Positioning

Reconstructing the Value Chain

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Human Resource Management(e.g. Recruiting, Training, Compensation System)

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Human Resource Management(e.g. Recruiting, Training, Compensation System)

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Human Resource Management(e.g. Recruiting, Training, Compensation System)

• Enhanced procurement to support vendor quality, efficiency, and price

• Recruiting from diverse and disadvantaged communities

• Employee education and job

InboundLogistics

Operations OutboundLogistics

Marketing& Sales

After-Sales Service

Ma

rg

in

Procurement(e.g. Components, Machinery, Advertising, Services)

Technology Development(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

InboundLogistics

Operations OutboundLogistics

Marketing& Sales

After-Sales Service

Ma

rg

in

Procurement(e.g. Components, Machinery, Advertising, Services)

Technology Development(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

InboundLogistics

Operations OutboundLogistics

Marketing& Sales

After-Sales Service

Ma

rg

in

Procurement(e.g. Components, Machinery, Advertising, Services)

Technology Development(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

y, prealization

• Sourcing locally• Local and small vendor

development• Purchasing transparency

Employee education and job training

• Enhancing employee health• Modifying compensation and

benefit practices for lower income workersg

(e.g. Incoming Material

Storage, Data Collection,

Service, Customer Access)

(e.g. Assembly, Component Fabrication,

Branch Operations)

g

(e.g. Order Processing,

Warehousing, Report

Preparation)

(e.g. Sales Force, Promotion, Advertising,

Proposal Writing, Web

site)

(e.g. Installation, Customer Support,

Complaint Resolution,

Repair)

g(e.g. Incoming

Material Storage, Data

Collection, Service,

Customer Access)

(e.g. Assembly, Component Fabrication,

Branch Operations)

g

(e.g. Order Processing,

Warehousing, Report

Preparation)

(e.g. Sales Force, Promotion, Advertising,

Proposal Writing, Web

site)

(e.g. Installation, Customer Support,

Complaint Resolution,

Repair)

g(e.g. Incoming

Material Storage, Data

Collection, Service,

Customer Access)

(e.g. Assembly, Component Fabrication,

Branch Operations)

g

(e.g. Order Processing,

Warehousing, Report

Preparation)

(e.g. Sales Force, Promotion, Advertising,

Proposal Writing, Web

site)

(e.g. Installation, Customer Support,

Complaint Resolution,

Repair)

• Limiting logistical intensity

• Enhancing retention

• Process transformation

g g yand impacts

• Local processing • Packaging use and disposal

• Recycling and reuse of products

• Remote services

• Local channel development• Local processing• Limiting emissions and waste• Minimizing use of hazardous

materials• Better energy and water use• Worker safety

• Packaging use and disposal • Limiting logistical intensity

• Local channel development• Marketing nutrition, safety,

and low environmental impact• Pricing models for lower

income customers• Sustainable credit policies

• The greatest opportunities for shared value are in activities most salient to a company’s particular business– Some opportunities will be generic to many companies, and become new best practices

• Some opportunities to create shared value will create competitive advantage and reinforce a company’s

• Upskilling

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Some opportunities to create shared value will create competitive advantage and reinforce a company s strategy

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The Social Dimension of Products

• Most products and services address not just economic but social needs, such as:– Environmental impact– Safety– Health and nutrition– Savings / sound financing

Inclusion– Inclusion – Education

• There is new awareness of underserved needs in disadvantaged and developing markets

– “Bottom of the Pyramid”– Reverse product innovation

• Markets are rapidly growing for “social” products– A new generation of social entrepreneurs are embracing market principles– Corporations have largely sat on the sidelines

23 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt

p g y

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Building Local ClustersImproving Deficits in the Business Environment

Creating a Healthy Business Environment

Context for Firm Strateg and

•Local market organization and price transparency•Fair local competition (e.g., the

•Availability of qualified human resources•Access to appropriate education

Strategy and Rivalry

absence of trade barriers and market distortions)•Regulatory structure (e.g., land use, resource use)

and training programs relevant to the business•Availability of efficient logistical infrastructure•Availability of credit for local organizations•Local research on products and

dd i l l d

Factor(Input) Conditions

Demand Conditions

processes addressing local needs

Related and Supporting

(Input) Conditions Conditions

•Product standards meeting the needs of local customers•Availability of local distribution

•Availability of capable local suppliers and support services•Cooperates and business groups Supporting

Industries•Availability of local distribution channels•Quality certification organizations

•Cooperates and business groupsto enable collaboration

• Deficits in the business environment create internal costs

24 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.pptSource: Michael Porter, The Competitive Advantage of Nations, 1990

• A strong local cluster enables productivity

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Creating Shared ValueNestlé

Nutrition

Water RuralWater Rural Development

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Page 26: Strategic Positioning

Adding a Social Dimension to Strategy

• Customers and business partners value social performance, not just economic performance

• Companies can have the greatest societal impact in areas tightly connected to their business

– This is where societal performance and economic performance intersect p pmost closely

• Societal improvements create shared value that drive the competitiveness of the businesscompetitiveness of the business

• Companies should incorporate a social dimension to their value propositionShared value can reinforce the company’s unique strategic positioning• Shared value can reinforce the company’s unique strategic positioning

• This social dimension of strategy can be more sustainable than conventional cost and quality advantages

26 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt

Page 27: Strategic Positioning

Shared Value and Strategic PositioningWhole Foods Markets

Value PropositionValue Proposition DistinctiveDistinctiveActivitiesActivities

• Natural, fresh, organic, and prepared foods and health items with excellent service at premium prices

• Cater to specialized nutritional requirements (gluten allergies, vegan, etc.)

• Well-lit, inviting supermarket store formats with appealing displays and extensive prepared foods sections

• Produce section as “theater”• Café-style seating areas with wireless internet for meetings and

meals• Educated, middle class, and affluent customers who are

passionate about food and a healthy lifestyle

meals• Each store carries local produce and has the authority to contract

with the local farmers. Company provides low-interest loans if needed. Microcredit in supplier communities

• Information and education provided to shoppers along with productsproducts

• High touch in-store customer service via knowledgeable, flexible, and highly motivated personnel

• Flat compensation structure• Own seafood procurement and processing facilities to control

quality (and price) from the boat to the counterq y ( p )• Heavy emphasis on environmental sustainability. Each store has

“green projects,” directed by employees to improve environmental performance

• All in-store materials are biodegradable – no plastic bags available and customers given discounts for reusable bags

• Emphasis on supporting community development

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• Successful future strategies will include social dimensions

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The Purpose of Business

• There is an opportunity to transform thinking and practice about the role of the corporation in society, using the concept of shared value

• Shared value arises from a deeper understanding of doing business that transcends narrower conceptions of economic efficiency that have guided company operations

• Shared value thinking will provide new catalysts for global economic growthShared value thinking will provide new catalysts for global economic growth and the next wave of innovation and productivity in the global economy

• Businesses acting as businesses not as charitable givers are arguably the• Businesses acting as businesses, not as charitable givers, are arguably the most powerful force for addressing many pressing issues facing our society

A t f ti f b i ti d h d l ill i• A transformation of business practice around shared value will give purposeto the corporation and to capitalism itself, and represents our best chance to legitimize business again

28 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt

Page 29: Strategic Positioning

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 conditionsDo 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

S i t iti f di ti iti hi h lik l t• Seize opportunities for discontinuities which are more likely to emerge

29 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt

• Strategy is more important in downturns, not less

Page 30: Strategic Positioning

Backup

30 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt

Page 31: Strategic Positioning

Mutually Reinforcing Activities Ikea

Ample inventory on

site

High traffic

Suburban or high-access

locations

Self delivery by most customers

Large stores with ample parking

High traffic store layout

Year-round Self-selection by In-house

customersLimited in-store sales

help

Year round stocking to even out

production

ythe customer design of

product families

Designer identification of compatible

lines

100 percent sourcing from

long term

Low manufacturing costs

long-term suppliers

Modular, design approach with attractive styles and

materials

High variety, but ease of

31 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt

• Fit is leveraging what is different to be more different

manufacturing