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Professor Michael E P t P f Mi h l E. Porter Harvard Business School Madrid ExpoManagement June 16, 2010
This presentation draws on ideas from Professor Porters books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (Th F Ad t (The Free P Press, 198 ) Wh i S 1985); What is Strategy? (H ? (Harvard B i d Business R i Review, N /D 1996) S Nov/Dec 1996); Strategy and the I d h Internet (H (Harvard B i d 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 meanselectronic, mechanical, photocopying, recording, or otherwisewithout 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
20100616 MadridExpomanagement.ppt
Thinking Strategically
COMPETING TO BE UNIQUE
The worst error in strategy is to compete with rivals on the same dimensions
20100616 MadridExpomanagement.ppt
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
20100616 MadridExpomanagement.ppt
Economic Performance
Shareholder Value
Shareholder value is the result of creating real economic value Pleasing todays shareholders is not the goal today s
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Lower Cost
20100616 MadridExpomanagement.ppt
Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research)
M a r g
Procurement
(e.g. Components, Machinery, Advertising, Services)
Inbound Logistics
(e.g. Incoming Material Storage, Data g , Collection, Service, Customer Access)
Operations
(e.g. Assembly, Component Fabrication, Branch Operations)
Outbound Logistics
(e.g. Order Processing, Warehousing, g, Report Preparation)
i n
Primary Activities
All competitive advantage resides in the value chain. Strategy is p g gy manifested in how activities in the value chain are configured and linked together
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Operational Effectiveness
Strategic Positioning
20100616 MadridExpomanagement.ppt
A unique value proposition compared t other organizations d to th i ti A different, tailored value chain Clear tradeoffs, and choosing what not to do Activities in the value chain that fit g together and reinforce each other Strategic continuity with continual improvement in realization
20100616 MadridExpomanagement.ppt
Strategic Positioning
IKEA, Sweden
Value Proposition
Distinctive Activities
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 on-site Self-selection Extensive customer information in the form of catalogs, explanatory ticketing, do-it-yourself videos, and y 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
Young, first time, or price-sensitive buyers Stylish, space efficient and scalable furniture and accessories at very low price points.
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What Wh t Customers?
Which Needs?
What Relative Price?
Premium? Discount?
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Strategic Positioning
Nespresso
Value Proposition Distinctive Activities
Uniquely high quality, easy to prepare espresso coffee at a premium price Demanding convenience-sensitive, Demanding, con enience sensiti e affluent consumers and offices
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A unique value proposition compared t other organizations d to th i ti A different, tailored value chain Clear tradeoffs, and choosing what not to do Activities in the value chain that fit g together and reinforce each other Strategic continuity with continual improvement in realization
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Strategic Tradeoffs
IKEA, Sweden
IKEA
Product Low-priced, modular, ready-to-assemble designs No custom options Furniture design driven by cost, manufacturing g y , g simplicity, and style Value Chain Centralized, in-house design of all p , g products All styles on display in huge warehouse stores Large on-site inventories g Limited sales help, but extensive customer information Long hours of operation
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
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Selfselection by customer
Designer identification of compatible lines Year-round Year round stocking to even out production
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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 continuity i th value proposition Maintain ti it in the l iti Continuously improve ways to realize the value proposition
St t i continuity and continuous change should occur simultaneously. Th are not Strategic ti it d ti h h ld i lt l They t inconsistent
Continuity of strategy allows learning and change to be faster and more effective
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Yet concern with social issues will be a defining characteristic of the post-crisis era
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Narrow cost minimization Ease of outsourcing, relocating, and globalizing Shortening time horizons Tradeoff mindset
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Worker Safety
Environmental Impact
Company Productivity P d ti it
Gender Equity
Energy Use
Social deficits create economic cost External conditions shape company productivity
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Fi d and expand th congruence b t Find d d the between economic and societal objectives, i d i t l bj ti 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
Achieving shared value requires new operating practices, new technologies, technologies and new approaches to competing
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CSR
CSV
Values: doing good Philanthropy Selfless Discretionary Agenda externally determined Separate from profit maximization Limited (CSR) budget
Value: economic and social benefits relative to cost Joint value creation Mutual benefits for the company p y Integral to competing Company specific / internally generated Integral to profit maximization Total budget
In either case, compliance with regulations and good corporate practice is assumed.
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Copyright 2010 Professor Michael E. Porter
20100616 MadridExpomanagement.ppt
Build clusters and a supportive local external context to enhance pp productivity and create self-reinforcing economic development
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Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research)
M a r g
Procurement
(e.g. Components, Machinery, Advertising, Services)
Inbound g Logistics
(e.g. Incoming Material Storage, Data Collection, Service, Customer Access)
Operations
(e.g. Assembly, Component Fabrication, Branch Operations)
Outbound g Logistics
After-Sales Service
(e.g. Installation, Customer Support, Complaint Resolution, Repair)
i n
Recruiting from diverse and disadvantaged communities Employee education and job training Enhancing employee health Modifying compensation and benefit practices for lower income workers Enhancing retention Process transformation
(e.g. Order (e.g. Sales Force, Processing, Promotion, Warehousing, Advertising, Report Proposal Preparation) Writing, Web site)
Recycling and reuse of products Remote services 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
Local processing Limiting emissions and waste Minimizing use of hazardous materials Better energy and water use Worker safety Upskilling
The greatest opportunities for shared value are in activities most salient to a companys particular business Some opportunities will be generic to many companies, and become new best practices company s Some opportunities to create shared value will create competitive advantage and reinforce a companys strategy
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Demand Conditions
Availability of capable local suppliers and support services Cooperates and business groups to enable collaboration
Product standards meeting the needs of local customers Availability of local distribution channels Quality certification organizations
Deficits in the business environment create internal costs A strong local cluster enables productivity
Source: Michael Porter, The Competitive Advantage of Nations, 1990
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Nutrition
Water
Rural Development
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Societal improvements create shared value that drive the competitiveness of the business
Companies should incorporate a social dimension to their value proposition Shared value can reinforce the companys unique strategic positioning This social dimension of strategy can be more sustainable than conventional cost and quality advantages
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Distinctive Activities
Well-lit, inviting supermarket store formats with appealing displays and extensive prepared foods sections Produce section as theater Caf-style seating areas with wireless internet for meetings and 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 products High touch in-store customer service via knowledgeable, flexible, and highly motivated personnel Flat compensation structure Own seafood procurement and processing facilities to control q quality ( y (and p price) from the boat to the counter ) 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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Backup
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Limited instore sales help Year round Year-round stocking to even out production
Self-selection by y the customer In-house design of product families
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