Strategy and Competition

Transcription

1 Strategy and Competition Professor Michael E. Porter Harvard Business School BSP International Conference Pont Fer, Phoenix, Mauritius April 2 nd, 2014 This 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); 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,

2 Thinking Strategically COMPETING TO BE THE BEST COMPETING TO BE UNIQUE The worst error in strategy is to compete with rivals on the same dimensions 2

3 What Do We Mean by a Strategy? Strategy is different than aspirations Our strategy is to be #1 or #2 Our strategy is to grow Our strategy is to provide superior returns to our shareholders Strategy is more than a particular action Our strategy is to merge internationalize consolidate the industry double our R&D budget Strategy is not the same as vision / values Our strategy is to serve our customers and communities meeting the highest standards of integrity Strategy defines the company s distinctive approach to competing and the competitive advantages on which it will be based 3

4 Setting the Right Financial 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 4

5 Levels of Strategy Corporate Strategy What set of businesses to compete in Capturing synergies across business units Competitive or Business Strategy How to compete in each distinct business or industry 5

6 Business Strategy Drivers of Company Performance Industry Structure Strategic Positioning Within the Industry - Industry Attractiveness - Sustainable Competitive Advantage Company economic performance results from two distinct causes Companies need to focus on the health of the industry, which can be as important as a company s own position 6

7 Understanding Industry Structure Threat of Substitute Products or Services Bargaining Power of Suppliers Rivalry Among Existing Competitors Bargaining Power of Buyers Threat of New Entrants Part of strategy is to drive a positive transformation in industry structure 7

8 Understanding Industry Structure Threat of Substitute Products or Services Bargaining Power of Suppliers Rivalry Among Existing Competitors Bargaining Power of Buyers Channels End users Threat of New Entrants Part of strategy is to drive a positive transformation in industry structure 8

9 Analyzing Industry Structure Industrial Gases Threat of Substitute Products or Services Use of industrial gases in industrial production and other fields is growing versus alternative methods Bargaining Power of Suppliers Rivalry Among Existing Competitors Bargaining Power of Buyers Price takers for feedstocks and energy Contracts pass through input costs Numerous types of gas sold to diverse customers (e.g. oxygen, hydrogen) The product is a commodity Four large companies control 2/3 of the global market Threat of New Entrants High capital cost to enter Need to achieve customer density to be efficient Rising environmental requirements Customers are industrial producers, energy companies, health care facilities, metal producers, and others Gases are a small part of total cost but significantly improve productivity Long-term contracts and on-site facilities at customers create switching costs High transport costs create benefits of customer density and local market barriers 9

10 Industry Structure and Positioning U.S. Heavy Trucks Threat of Substitute Products or Services Railroads Water transportation Bargaining Power of Suppliers Large independent suppliers of branded engines and drive train components Unionized labor Rivalry Among Existing Competitors Vigorous price competition on standardized models Rising environmental and energy requirements Bargaining Power of Buyers Trucking company consolidation into large fleets Rise of leasing companies Small fleets and owner operators Threat of New Entrants Limited entry barriers for assemblers 10

11 Industry Structure and Positioning Paccar Focus on owner-operators Compete on differentiation Design trucks with special features and amenities Customization and build-to-order Design for low truck operating costs Offer extensive roadside assistance to truckers Command a premium price Paccar s positioning avoids the negative aspects of industry structure 11

12 Shaping Industry Structure Tetra Pak in Aseptic Food Packaging Threat of Substitute Products or Services Other package types and packaging technologies (refrigerated, retort cans/ bottles) Aggressively advocates aseptic packaging versus other forms Big focus on sustainability Bargaining Power of Suppliers Machinery, ingredient, and package suppliers Ties packaging material sales to sale of machines Rivalry Among Existing Competitors Food packaging companies Provides standard products and technical assistance and support to level the playing field among its customers Threat of New Entrants Bargaining Power of Buyers Consumer and food-away-from-home food companies Invests in educating, and supporting food companies to shift to aseptic packaging and working with Tetra Pak customers New entrants to aseptic packaging Provides extensive assistance and financing to bring new packers into aseptic 12

13 Shifting the Nature of Industry Competition Zero Sum Competition Positive Sum Competition Compete head to head on price One company s gain requires another company s loss Compete on distinctive strategic positioning More than one company can be successful Competition dissipates industry structure and profitability Competition expands the customers served, the needs that are met, and the overall value pool 13

14 Positioning Types of Competitive Advantage Differentiation (Premium Price) Competitive Advantage Lower Cost Operating Cost Utilization of Capital 14

15 Sources of Competitive Advantage The Value Chain Firm Infrastructure (e.g., Financing, Planning, Investor Relations) Support Activities Inbound Logistics (e.g., Customer Access, Data Collection, Incoming Material Storage, Service) Human Resource Management (e.g., Recruiting, Training, Compensation System) Technology Development (e.g., Product Design, Process Design, Market Research) Procurement (e.g., Services, Machines, Advertising, Data) Operations (e.g., Branch Operations, Assembly, Component Fabrication) Outbound Logistics (e.g., Order Processing, Warehousing, Report Preparation) Marketing & Sales (e.g., Sales Force, Promotion, Advertising, Proposal Writing, Website) After-Sales Service (e.g., Installation, Customer Support, Complaint Resolution, Repair) M n a i r g Value What buyers are willing to pay Primary Activities The value chain is the activities involved in delivering value to customers Strategy is reflected in the set of choices about how activities are configured and linked together 15

16 Operational Effectiveness Versus Strategy Operational Effectiveness Strategic Positioning Assimilating, attaining, and extending best practices Creating a unique value proposition Doing the same things better and better Doing things differently to deliver distinctive value Validating and Executing Making Choices 16

17 Tests of a Successful Strategy A unique value proposition compared to competitors 17

18 Defining the Value Proposition What Customers? Which Needs? What end users? What channels? Which products? Which features? Which services? What Relative Price? Premium? Parity? Discount? A novel value proposition can expand the market Finding a unique value proposition often involves a new way of segmenting the market 18

19 Value Proposition Strategic Positioning IKEA, Sweden A wide line of stylish, functional and good quality furniture and accessories sold with limited customer service Very low price points 19

20 Tests of a Successful Strategy A unique value proposition compared to competitors A distinctive value chain involving clear choices about how the company will operate differently to deliver its value proposition 20

21 Strategic Positioning IKEA, Sweden Value Proposition Distinctive Activities A wide line of stylish, functional and good quality furniture and accessories sold with limited customer service Very low price points Wide range of styles which are all displayed in huge warehouse stores with large on-site inventories Modular, ready-to-assemble, easy to ship furniture designs In-house design of all products IKEA designer names attached to related products to inform coordinated purchases Self-selection by the customer, with minimal in-store service Extensive customer information in the form of catalogs, mobile app, website, explanatory ticketing, do-it-yourself videos, online planning tools, and assembly instructions Self-delivery by most customers Suburban and urban locations with large parking lots Long hours of operation On-site, low-cost restaurants Child care provided in the store 21

22 Strategic Positioning PACCAR Value Proposition Distinctive Activities Highly customized trucks targeted at owneroperators offering superior amenities but low cost of operations and providing extensive customer support Command a 10% premium price Customized features and amenities geared toward owner-operators (e.g., luxurious sleeper cabins, plush leather seats, noise-insulated cabins, sleek exterior styling, etc.) Products designed for durability and resale value Industry leader in fuel efficiency and emissions reduction, including hybrids Provide diagnostic services for customers (e.g., fuel efficiency, remote service analysis) Offer truck financing, leasing and insurance services Flexible manufacturing system configured for customization Built to order, not to stock Extensive dealer network (1,800 locations) to provide extensive customer contact and aftermarket support Extensive roadside assistance network 24-hour parts distribution system providing rapid repair and uptime 22

23 Tests of a Successful Strategy A unique value proposition compared to competitors A distinctive value chain involving clear choices about how the company will operate differently to deliver its value proposition Making clear tradeoffs, and choosing what not to do 23

24 Making Strategic Tradeoffs IKEA, Sweden IKEA Product Low-priced, modular, ready-to-assemble designs No custom options Furniture design driven by style, manufacturing cost and assembly simplicity 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 Typical Furniture Retailer 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 Tradeoffs create the need for choice Tradeoffs make a strategy sustainable against imitation by established rivals 24

25 Tests of a Successful Strategy A unique value proposition compared to competitors A distinctive value chain involving clear choices about how the company will operate differently to deliver its value proposition Making clear tradeoffs, and choosing what not to do Integrating activity choices across the value chain to fit together and reinforce each other 25

26 Typical Thinking About the Sources of Competitive Advantage Key Success Factors Core Competencies Critical Resources Competitive advantage is usually seen as concentrated in a few parts of the value chain 26

27 Instructions and support for customer assembly Mutually Reinforcing Activity Choices Suburban locations with ample parking Customer self delivery and Assembly IKEA Very large stores All items on display and in-stock Very low prices Self-selection by customer High traffic store layout Explanatory catalogs, Informative displays and Labels Ease of transport and assembly Designer identification of compatible lines Complete but limited line of furniture and accessories to furnish apartments and other living spaces Year-round stocking to even out production Knock-down kit packaging Modular, scalable furniture designs In-house design focused on cost of manufacturing High variety, but ease of manufacturing Low manufacturing and logistical costs 100 percent sourcing from Long-term suppliers Fit is leveraging what is different to be more different 27

28 Tests of a Successful Strategy A unique value proposition compared to competitors A distinctive value chain involving clear choices about how the company will operate differently to deliver its value proposition Making clear tradeoffs, and choosing what not to do Integrating activity choices across the value chain to fit together and reinforce each other Continuity of strategic direction with continuous improvement in realizing the unique value proposition 28

29 Strategic Continuity Continuity of strategy is essential to creating and sustaining competitive advantage Understanding the strategy throughout the organization Building truly unique skills and assets related to the strategy Establishing a clear identity with customers, channels, and vendors Reinvention and frequent shifts in direction are costly and confuse the customer, the industry, and the organization Maintain continuity in the value proposition, but continuously improve how to realize it Continuity of strategy allows faster improvement Strategic continuity and continuous change are reinforcing 29

30 Finding a Unique Strategic Position Understanding industry structure Finding a novel value proposition Creative segmentation 30

31 Creative Segmentation Enterprise Rent-A-Car Value Proposition Distinctive Activities Home-city replacement cars to drivers whose cars are being repaired or who need an extra vehicle, at low rates (30% below airport rates) Affordable home-city rentals for occasional drivers who do not own a car Numerous, small, inexpensive offices, including on-premises offices at major accounts Open during daylight hours Delivers cars to customers homes or rental sites, or customers to cars Offers flexible hourly rental through automated technology (Enterprise CarShare) Acquire new and older cars, favoring soon-to-be discontinued older models Keep cars six months longer than other major rental companies In-house reservations Grassroots marketing using traditional and social media Cultivate strong relationships with auto dealerships, body shops, and insurance adjusters Hire extroverted college graduates to encourage community interaction, customer service, and university relationships Employ a highly sophisticated computer network to track its fleet 31

32 Finding a Unique Strategic Position Understanding industry structure Finding a novel value proposition Creative segmentation Reinventing the value chain 32

33 Reinventing the Value Chain Nespresso Value Proposition Distinctive Activities Uniquely high quality, easy-to-prepare single-serve espresso coffee at a premium price Discriminating, convenience-sensitive consumers and offices Extra-high quality ground coffee in 21 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 300 coffee boutique shops in major cities, not in mass market food channels Nespresso Club to achieve high levels of communication with customers Focused image-oriented media advertising 33

34 Finding a Unique Strategic Position Understanding industry structure Finding a novel value proposition Creative segmentation Reinventing the value chain Recognizing and capitalizing on changes, technology, customers, needs, regulation, and others Successful strategies involve a core strategic insight that is improved and expanded over time 34

35 Growing Strategically 1. Make the strategy even more distinctive Introduce new technologies, features, products or services that leverage other distinctive activities within the value chain Create a social dimension to the value proposition and 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 value the strategy 35

36 Growth Pitfalls 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 market share In many cases, shareholders are actually best served by moderate growth, earning a high ROI, and returning capital, especially via dividends 36

37 Internationalization Strategic Principles Internationalize in ways that reinforce the company s strategy Internationalize first in product lines or customer segments where the company has the most unique advantages Prioritize markets to enter Similar needs and segments Expatriates Gain direct access to foreign markets as soon as practical rather than relying solely on intermediaries Use alliances selectively as transitional strategies Ensure that alliances do not block the company s ability to gain competitive advantage and build its own capabilities Locate and integrate manufacturing and other activities from a regional perspective 37

38 Defining the Industry: Product Scope Industry Definition What set of products constitute the relevant industry? e.g., Trucks vs. Heavy Trucks How similar is industry structure? How similar is the Value Chain? Bargaining Power of Suppliers Threat of Substitute Products or Services Rivalry Among Existing Competitors Threat of New Entrants Bargaining Power of Buyers Support Activities Inbound Logistics (e.g., Incoming Material Storage, Data Collection, Service, Customer Access) Firm Infrastructure (e.g., Financing, Planning, Investor Relations) Human Resource Management (e.g., Recruiting, Training, Compensation System) Technology Development (e.g., Product Design, Testing, Process Design, Material Research, Market Research) Procurement (e.g., Components, Machinery, Advertising, Services)` Operations (e.g., Assembly, Component Fabrication, Branch Operations) Outbound Logistics (e.g., Order Processing, Warehousing, Report Preparation) Marketing & Sales (e.g., Sales Force, Promotion, Advertising, Proposal Writing, Web site) After-Sales Service (e.g., Installation, Customer Support, Complaint Resolution, Repair) M a r g n i Value What buyers are willing to pay Primary Activities A distinct strategy is needed for each distinct business 38

39 Defining the Industry: Geographic Scope Local / State Regional National Global Separate local value chains Support Activities Inbound Logistics (e.g., Incoming Material Storage, Data Collection, Service, Customer Access) Firm Infrastructure (e.g., Financing, Planning, Investor Relations) Human Resource Management (e.g., Recruiting, Training, Compensation System) Technology Development (e.g., Product Design, Testing, Process Design, Material Research, Market Research) Procurement (e.g., Components, Machinery, Advertising, Services)` Operations (e.g., Assembly, Component Fabrication, Branch Operations) Outbound Logistics (e.g., Order Processing, Warehousing, Report Preparation) Marketing & Sales (e.g., Sales Force, Promotion, Advertising, Proposal Writing, Web site) After-Sales Service (e.g., Installation, Customer Support, Complaint Resolution, Repair) M n a i r g Integrated global value chain Activities located and shared from a worldwide perspective Value What buyers are willing to pay Primary Activities Geographic scope of competition is determined by the ability to leverage activities in the value chain across borders Industries differ substantially in the geographic scope of competition 39

40 Levels of Strategy Corporate Strategy What set of businesses to compete in Capturing synergies across business units Competitive or Business Strategy How to compete in each distinct business or industry 40

41 Fundamentals of Corporate Strategy Overall corporate size or diversity per se does not create economic value Competition occurs at the level of individual businesses, where competitive advantage resides Being part of a diversified company involves inevitable costs for business units Shareholders can diversify directly at lower cost A successful corporate strategy must produce clear and significant benefits to the competitive advantage of business units - The central issue is how being part of the corporation adds value to each business 41

42 Diversification in Emerging Economies Typical Business Groups Computer Wholesaler Fast Food Franchises Real Estate Services Financial Services Airline Tobacco Imports/ Distribution Food Processing Hotel Grocery Stores Textiles Car Dealership Industrial Parts Sugar 42

43 Company Transformation and Economic Development The Company Agenda in Developing Economies Traditional Aspiration 1. Dominant share of the local, protected market 2. Opportunistic to capitalize on opportunities created by instability and government policies 3. Me-too strategies imitating foreign companies based on low prices and low input costs 4. Low quality and inefficiency are tolerated 5. Short time horizon and low investment in people, brands and technology 6. Limited participation in the value chain with concentration on production activities Pursue a distinctive position in regional and international markets A long-term strategy for competing in each industry Create a distinctive value proposition Move to international best practices Sustained investment in human resources and technological capabilities Master the entire value chain, including technology, IT, and marketing 43

44 Company Transformation and Economic Development The Company Agenda in Developing Economies Traditional Aspiration 7. Wide product line focused on local market 8. Exports focused on labor-intensive commodities or goods to advanced economies 9. Heavy reliance on partners through OEM agreements, foreign distributors, and joint ventures 10. Conglomerate business groups operating in many disparate fields 11. Economic policy is left to government Focus on distinctive products to serve local and regional markets Export more differentiated, branded products and services to neighbors and niche markets in advanced countries Gain direct control of distribution, customer relationships, and technology needed to serve international markets Related diversification that creates synergies Companies take a leadership role in upgrading their cluster and improving the business environment 44

45 Real Estate Development Time Sharing Corporate Strategy The Walt Disney Company, 2010 Resort Hotels Guided Travel Motion Picture Distribution Hollywood Pictures Marvel Pixar Cruise Line Theme Parks Family Motion Pictures Sports Team Animated Feature Films Traveling Shows Multimedia Productions Broadway Productions Broadway Theater Acquired Through Cap Cities / ABC Merger Recent Direct Marketing Hollywood Records Retail Stores Hyperion Books Consumer Products Adult Publishing / Newspapers Disney Records Youth Books and Educational Materials Disney Interactive Media Television Programming Shared characters Shared brand Shared family values Cross-promotions Disney Channel Radio Stations Adult Cable Channels Television Network ESPN Television Stations 45

46 Corporate Strategy: Creating Corporate Value Added M a r g i n M a r g i n Leveraging fit across the value chains of business units Sharing activities across business units Harnessing proprietary knowledge and skills across units One-time savings in overhead are not enough 46

47 Corporate Strategy Amazon Retail Value Proposition Distinctive Activities Exhaustive product offering (digital and physical goods) through its e-commerce marketplace Low price across the entire product range Convenient self-service online shopping experience and fast, reliable delivery Amazon Price Check mobile app allows for instant comparison of in-store vs. Amazon prices Targeted product recommendations help customers find items they might be interested in Customer reviews available for all products, with most helpful reviews prioritized Expand product offering by opening web platform to third-party sellers Large selection of digital products as well as physical Subscribe & Save service offers discounts and convenience for recurring orders Vast distribution network and hi-tech inventory management system allow for fast and low cost delivery Fulfillment by Amazon (FBA) expands third party product base and reduces shipping times Amazon Prime membership offers free two-day shipping, and inexpensive one-day shipping, encouraging loyalty and creating advantages over narrower competitors Utilizes extensive IT investment to build proactive, automated customer service systems 47

48 Business Unit Strategy The Process of Developing a Strategy Focused on industry structure and positioning Strategy should be developed and periodically reviewed in a formal process rather than being left to occur spontaneously Business unit strategy development is best done in a multifunctional business unit team including the business unit head and heads of important functions The strategy team is relatively small The team needs to work together not separately The strategic planning department serves as staff Strategic planning should be separate from budgeting A strategy review, which examines the assumptions on which the strategy is based, should take place formally at least once per year Corporate Strategy Focused on the scope of businesses in the portfolio and synergy Corporate strategy is the responsibility of the CEO and the leadership team Input can be solicited more broadly among management Corporate planning staff should play a support role 48

49 Communicating Strategy Strategy involves everyone in an organization, not just senior management The basic strategy and value proposition must also be communicated to customers, channels, suppliers, and financial markets What about confidentiality? The benefits of strategy are greatest when it is communicated widely in the organization Communicating strategy requires a simple and vivid way of describing the essence of the company s unique position Symbols of the strategy are invaluable tools Repetition Leaders should not assume that subordinates understand the strategy, or that they agree with it Help each organizational unit translate the strategy into implications for its own mandate Individuals who do not ultimately accept the strategy cannot have an ongoing role in the company 49

50 Why Do Good Managers Choose Bad Strategies? Misunderstanding of strategy principles Industry conventional wisdom leads all companies to follow common practices Customers request new products or services that do not fit the strategy Poor cost allocation leads to too many products, services, or customers A desire for consensus blurs strategic tradeoffs Strong pressures to imitate successful peers Desire for growth drives the company beyond its competitive advantages Rapid turnover of leadership undermines strategy in favor of short-term performance 50

51 The Role of Leaders in Strategy Distinguish operational improvement from strategy Lead the process of strategic choice The CEO is the chief strategist Communicate the strategy relentlessly to all constituencies Strategy creates alignment and motivation Maintain discipline around the strategy, in the face of many distractions Decide which industry changes, technologies, and customer needs are relevant, and how to tailor responses to the company's strategy Measure progress against the strategy using metrics that measure success of a company s unique value proposition Sell the strategy and how to evaluate progress against the strategy to the financial markets Commitment to strategy is tested every day 51