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Transcript of 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
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
2 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
3 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
4 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
• Pleasing today s shareholders is not the goal
Determinants of Superior Performance
Differentiation(Higher Price)
C titiC titiCompetitiveAdvantage
CompetitiveAdvantage
Lower Cost
5 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
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
7 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
8 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
9 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
10 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
11 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
12 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
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
14 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
long-term suppliers
kit packagingmanufacturing
• Fit is leveraging what is different to be more different
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
15 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
• Continuity of strategy allows learning and change to be faster and more effective
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
16 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
17 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
18 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
• Social deficits create economic cost• External conditions shape company productivity
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
19 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
technologies, and new approaches to competing
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
20 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
increase quality and yield
• In either case, compliance with regulations and good corporate practice is assumed.
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
21 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
22 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
Some opportunities to create shared value will create competitive advantage and reinforce a company s strategy
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
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
Creating Shared ValueNestlé
Nutrition
Water RuralWater Rural Development
25 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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
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
27 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
• Successful future strategies will include social dimensions
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
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
Backup
30 Copyright 2010 © Professor Michael E. Porter20100616 – MadridExpomanagement.ppt
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