Reinventing Strategy: the New Learning

Copyright 2005 © Professor Michael E. Porter

Reinventing Strategy: the New Learning

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.

2 Copyright 2005 © Professor Michael E. Porter20050711 Thailand – Final 07062005 -NV.ppt

Agenda

• The Economic Foundations of Competition

• Principles of Strategy

• Developing a Strategy

• Strategy for Diversified Business Groups


How Managers Think About Competition

COMPETING TO BE THE BEST

COMPETING TO BE THE COMPETING TO BE THE BESTBEST

COMPETING TO BE UNIQUE

COMPETING TO BE COMPETING TO BE UNIQUEUNIQUE

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


Flawed Concepts of Strategy

• Strategy as aspiration– “Our strategy is to be #1 or #2…”

• Strategy as action– “Our strategy is to merge…”– “Internationalize…”– “Consolidate the industry…”– “Outsource…”

• Strategy as what is important– “Technology strategy, customer strategy…”

• Strategy as vision

• Strategy as learning– “Our strategy is to learn and change”


Setting the Right Goals• The fundamental goal of a company is superior long-term return

on investment

• Growth is good only if superiority of ROIC is achieved and maintained

• Prevalent accounting adjustments to reported profitability can obscure true economic performance and lead to bad competitive choices

– The risks of write-offs, impairment charges, and ignoring amortization

• Profitability must be measured realistically, capturing the true profits on the full investment

• Goals and metrics besides ROIC (e.g. size; market share; revenue growth; eps growth; return on sales; ebitda margin; pro-forma earnings; cash flow) are risky for strategy


Economic Performance versus Shareholder Value

Economic PerformanceEconomic Economic

PerformancePerformance Shareholder ValueShareholder ValueShareholder Value

• ROIC

• Revenue Growth

• Stock Price

• EPS

• EPS Growth

• Shareholder value is the result of creating real economic value

• Pleasing today’s shareholders is not the goal


Economic Foundations of Competition Causes of Profitability

• The fundamental unit of strategic analysis is the industry- Defining the relevant industry is essential to strategy

• Company economic performance results from two distinct causes:

• Strategy must encompass both

IndustryStructureIndustryIndustryStructureStructure

Relative Position Within the

Industry

Relative Position Relative Position Within the Within the

IndustryIndustry

- Overall Rules of Competition - Sources of Competitive Advantage


Economic Foundations of Competition The Basic Economics of Strategy

0%

5%

10%

15%

20%

25%

30%

Pharmacia & Upjohn* Southwest Airlines

Return on Invested Capital

1985-2002

19.55%

12.75%

Source: CompustatNote: ROIC calculated as EBIT divided by Average Invested Capital (Total Assets less Excess Cash less Current Operating Liabilities)

* Prior to 1995, reflects Pharmacia only. Company was acquired in 2000 by Monsanto, which then changed its name to Pharmacia


Economic Foundations of Competition - Continued The Basic Economics of Strategy

0%

5%

10%

15%

20%

25%

30%

Pharmacia & Upjohn* Southwest Airlines

Return on Invested Capital

1985-2002

19.55%

12.75%

Source: CompustatNote: ROIC calculated as EBIT divided by Average Invested Capital (Total Assets less Excess Cash less Current Operating Liabilities)

* Prior to 1995, reflects Pharmacia only. Company was acquired in 2000 by Monsanto, which then changed its name to Pharmacia

28.14%

Industry Average

5.05%


0% 5% 10% 15% 20% 25% 30% 35%

Prepackaged Software

Pharmaceuticals

Semiconductors

Electromedical Apparatus

Groceries and Related Products - Wholesale

Restaurants

Surgical/Medical Instruments

Computer Programming & Data Processing

Homebuilding

Telephone Communications

Petroleum Refining

Motor Vehicles

Trucking

Motor Vehicle Parts & Accessory

Radio, TV Broadcast, & Comm Equipment

Hotels & Motels

Natural Gas Distribution

Catalog & Mail-Order Houses

Cable & Other Pay TV Services

Steel Works & Blast Furnaces

Airlines

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

Profitability of Selected U.S. Industries

Average ROIC in the U.S. Economy: 11.6%


Threat of SubstituteProducts or Services

Threat of New Entrants

Rivalry AmongExisting

Competitors

Bargaining Powerof Suppliers

Bargaining Powerof Buyers

Drivers of Long-Term Industry Profitability


Addressing Industry StructureBuyer Power

• Find the attractive customers– Large, “leading” customers tend to attract the most competition and

be the most demanding

• Grow alternative channels– Nurture and support alternative channels that bypass powerful

intermediaries or cultivate new customer groups

• Create end user pull– Temper the power of the immediate customer by appealing directly

to the end consumer

• Be different, not better– Strategic positioning to increase unique value to the customer


Threat of SubstituteProducts or Services



Competitors

Bargaining Powerof Suppliers

Bargaining Powerof Buyers

Shaping Industry Structure Foodservice Distribution

• Expand value-added services• Offer private label products

• National procurement contracts

• Offer private label products

• Expand value added services

• Increase investment in sophisticated IT and national marketing


• Expand value-added services



Determinants of Relative Performance

Differentiation(Higher Price)

Lower Cost

CompetitiveAdvantage

CompetitiveAdvantage


Strategic Economic ModelSouthwest Airlines

0

2

4

6

8

10

12

Southwest Airline Industry Average

Cents per ASM

Note: ASM (Available Seat Miles) defined as total seats available multiplied by miles flownSource: Airline annual reports and author’s calculations

Operating Profit per Available Seat Mile

Operating Cost per Available Seat Mile

Cost Advantage:2.44

Pricing Differential:1.72

Revenue and Cost per Available Seat Mile, Average of 1998 - 2000


• When they compete in a business, companies perform a set of discrete activities, in which competitive advantage resides

Sources of Competitive AdvantageActivities and the Value Chain

SupportActivities

Marketing& Sales

(e.g. Sales Force,

Promotion, Advertising,

Proposal Writing, Web

site)

InboundLogistics

(e.g. Incoming Material

Storage, Data Collection,

Service, Customer Access)

Operations

(e.g. Assembly, Component Fabrication,

Branch Operations)

OutboundLogistics

(e.g. Order Processing,

Warehousing, Report

Preparation)

After-Sales Service

(e.g. Installation, Customer Support,

Complaint Resolution,

Repair)

M

a

rg

i

n

Primary Activities

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

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

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

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

Value

What buyers are willing to pay


Marketing& Sales

(Lead generation, Model home

display, Sales force, Customer

selection of personalized

options)

Land Acquisition & Development

(Identify attractive markets, Secure

land, Procure entitlements and permits, Prepare

site)

Construction

(Design, Engineering, Schedule and

manage construction

process)

Closing

(e.g. Customer Financing,

Contract, Title, Closing)

After-Sales Service

(e.g. Warranties, Customer

Complaints)

M

a

rg

i

n

Primary Activities

SupportActivities


Procurement(e.g. Materials, Subcontracted Labor, Advertising, Services)

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


Identifying the Value Chain Homebuilding

Value



Commanding a Premium Price

• 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


Cost Advantage

• Cost is created by performing discrete activities

• Total cost must be disaggregated to the activity level

• Cost leadership usually involves cost advantages in many activities

• The relative cost of an activity is driven by a number of cost drivers

• Cost advantage often requires spending more on some activities

• Cost advantage is enhanced by mutually reinforcing choices in several activities (fit)

• Sustained cost leadership is accompanied by a supporting culture / values

Cost and Financial Performance

• Cost advantage is profitable if it exceeds any price discount offered to secure adequate volume

– Scale– Cumulative experience– Timing of asset

purchase– Institutional factors (e.g.

regulation, unionization)

– Fit (linkages with other activities)

– Sharing across businesses

– Policy choices

– Pattern of capacity utilization

– Integration vs. outsourcing

– Location of the activity


Agenda






• Creating a unique and sustainable competitive position

• Assimilating, attaining, and extending best practices

OperationalOperationalEffectivenessEffectiveness

StrategicStrategicPositioningPositioning

Run the same race faster Choose to run a different race

Achieving Superior PerformanceOperational Effectiveness is Not Strategy


Five Tests of a Good StrategyOverview

• A unique value propositioncompared to 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 propositioncompared to competitors






Strategic PositioningEnterprise Rent-A-Car

• Home-city replacement cars to drivers whose cars are being repaired or who need an extra vehicle, at low rates (30% below airport rates)

• 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

• 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 with limited television

• Cultivate strong relationships with auto dealerships, body shops, and insurance adjusters

• Hire extroverted college graduates to encourage community interaction and customer service

• Employ a highly sophisticated computer network to track its fleet

Value PropositionValue PropositionValue Proposition DistinctiveActivities

DistinctiveDistinctiveActivitiesActivities


Defining the Value Proposition

What Relative Price?

What Relative What Relative Price?Price?

What Customers?

What What Customers?Customers?

Which Needs?Which Which

Needs?Needs?

• What end users?

• What channels?

• Which products?

• Which features?

• Which services?


• 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


Creating Supply and Demand Curves Universal Stainless

Price B

Price A

Strategy A

Strategy B

MarginPrice,Cost

Volume


Recent Thinking on the Sustainability of Competitive Advantage

• “There are no sustainable competitive advantages anymore”

• “Any strategy can be imitated”

• “There are no sustainable competitive advantages anymore”

• “Any strategy can be imitated”


Making Strategic Tradeoffs

• Tradeoffs occur when strategic positions are incompatible

– the need for choice

Sources of Tradeoffs

– Incompatible product / service features or attributes

– Differences in the best configuration of activities in the value chain to deliver the chosen value proposition

– Inconsistencies in image or reputation across positions

– Limits on internal coordination, measurement, motivation, and control

• Tradeoffs make a strategy sustainable against imitation by established rivals

• An essential part of strategy is choosing what not to do


Strategic TradeoffsNeutrogena Soap (1990)

• Forgo cleaning, skin softening, and deodorizing features

• Choose higher costs through the configuration of:

– packaging

– manufacturing

– detailing

– medical advertising

– skin research

• Give up the ability to reach customers via:

– promotions

– television

– some distribution channels


Value Proposition

• Predominately male, experienced customers and contractors

• Building material, home improvement, and lawn & garden products

Set of Activities

• No-frills, warehouse design

- Merchandise stored in large racks and stacked on the floor

• All customers (including contractors) serviced out of same stores

• Bulk deliveries of products directly from vendors usually during the day

• Every-day low prices with volume discounts

Value Proposition

• Female shoppers and casual do-it-yourselfers

• Extensive home decor, appliance, kitchen, and lawn & garden offerings

Set of Activities

• Appealing store layout- Wider aisles, brighter lighting, lower ceilings

- “Stores-in-the-store” featuring fully-equipped kitchen & bath studios, lighting displays, etc.

• Contractors serviced by separate corporate division with different yards

• Hub-and-spoke distribution with just-in-time delivery usually after hours

• Every-day low prices without volume discounts

Strategic TradeoffsUS Home Improvement Industry

Lowe’sLoweLowe’’ssHome DepotHome DepotHome Depot


Evolution of Customer Management Thinking

• Be close to your customer

• Customer intimacy

• Customer retention

• Customer relationship management

• Delight your customer


Recent Thinking on the Sources of Competitive Advantage

• “Key” Success Factors

• “Core” Competencies

• “Critical” Resources

• “Key” Success Factors

• “Core” Competencies

• “Critical” Resources

• Competitive advantage is seen as concentrated in a few parts of the value chain


Southwest Airlines Mutually Reinforcing Activities

Limited Passenger

Service

Short-haul, point-to-point routes

between medium-sized cities and

secondary airports

Very Low Ticket Prices

Lean, Highly Productive

Ground and Gate Crews

Frequent, Reliable

Departures

High Aircraft

Utilization

15-Minute Gate Turns

Automatic Ticketing Machines

Standardized fleet of 737

aircraft

Limited use of travel agents

Flexible union

contracts

High employee

stock ownership

No seat assignments

No mealsNo

baggage transfers

No connections with other

airlines

“Southwest, the low-fare

airline”


Mutually Reinforcing Activities Zara

Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS

Very Very flexible flexible

production production systemsystem

Tight coordination

with 20 wholly-owned

factories

Extensive use of

store sales data

JIT delivery

Very Very frequent frequent product product changeschanges

CuttingCutting--edge fashion edge fashion at moderate at moderate

price and price and qualityquality

WordWord--ofof--mouth mouth

marketing marketing and repeat and repeat

buyingbuying

Little media advertising

Widely popular styles

Prime store Prime store locations in locations in high traffic high traffic

areasareas

Customers chic but

cost-conscious

Advanced production machinery

Global team of trend-

spotters

Production in Europe

• Fit is about leveraging what is different to be more different


• 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.”

Kevin Rollins, Vice Chairman

Why Are Good Strategies Not Imitated? Dell

Source: Forbes ASAP, April 5, 1999


Continuity of Strategy

• 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


• Imitating the offerings of foreign and other domestic competitors

• Price as the primary basis of competition

• Wide product lines that serve all local customer segments

Typical Strategic Errors in Emerging Economies


Barriers to Strategy

Flawed Concepts

• Misunderstanding of strategy itself

Industry Pressures

• Industry conventional wisdom leads all companies to follow common practices

• Labor agreements limit ways of configuring activities

• Regulation constrains price, product, service or process alternatives

• Customers ask for incompatible features or request new products or services that do not fit the strategy


Barriers to Strategy

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

market pressures


Barriers to StrategyNeutrogena Soap (2005)

• 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.


Agenda






Strategy for What?Defining the Right Business: Products

Product A Product C

Product E

Product B

Product D

Marketing& Sales

(e.g. Sales Force,

Promotion, Advertisin

g, Proposal Writing,

Web site)

InboundLogistics

(e.g. Incoming Material Storage,

Data Collection,


Operations

(e.g. Assembly, Component Fabrication

, Branch Operations

)

OutboundLogistics


Warehousing, Report

Preparation)

After-Sales Service



Repair)

M

a

rg

i

n

Primary Activities

SupportActivities





Value


Threat of SubstituteProducts or

Services



Competitors

Bargaining Power

of Suppliers

Bargaining Power

of Buyers


• Customers are independent restaurants and institutions

• The product line consists of well over 10,000 SKUs

• Sales and service activities are carried out by local sales reps

• Value-added services, credit terms, and distributors’ private-label products are valued and allow support product/service differentiation

• Logistical activities are heavily local in nature (local warehouses and trucks)

Defining the Right BusinessFoodservice Distribution

Broadline DistributionBroadline Distribution Systems Distribution

• Customers are national chains

• The product line consists of several hundred SKUs

• Customer relationships and services are specified by national contracts

• Price is the key basis for selection; customers do not purchase value-added services or private-label products

• A national distribution and warehousing network is required


Strategy for What?Defining the Right Business: Geography

GlobalGlobalGlobalNationalNationalNationalLocalLocalLocal RegionalRegionalRegional

SupportActivities

Marketing& Sales

(e.g. Sales Force,

Promotion, Advertising,

Proposal Writing, Web

site)

InboundLogistics

(e.g. Incoming Material

Storage, Data Collection,


Operations

(e.g. Assembly, Component Fabrication,

Branch Operations)

OutboundLogistics


Warehousing, Report

Preparation)

After-Sales Service



Repair)

M

a

rg

i

n

Primary Activities





Value


• Separate local value chains

• Integrated global value chain

Ability to Leverage Key Activities Across Geography

Cross-NationalCrossCross--

NationalNational


Revealing a Strategy

• History– Understand the unique position that the company may have

occupied in the past

– Can it be updated with new technology and delivery mechanisms?

• Results– Measure sales by customer type / product type– Understand product line / customer profitability

– What is the strategy that explains the areas of superior profitability?


Creating a Strategy

Unique Activities• Building off activities with true

uniqueness• Looking for new activity

configurations and combinations

• Migrate toward the chosen strategic position• Focus incremental investments on reinforcing the chosen position

Strategic Segmentation• Creatively segmenting product

varieties, customer groups, and purchase occasions

Tradeoffs• Finding tradeoffs in the value

proposition or in the value chain

Industry Dynamics• Identifying strategic positions opened

up by industry changes


Customer Group• “Preferred”, lowest risk drivers

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

ProgressiveProgressiveProgressive GeicoGeicoGeico


Segmentation and Strategic PositioningEnterprise Rent-A-Car

• Home-city replacement cars to drivers whose cars are being repaired or who need an extra vehicle, at low rental rates (30% below airport rates)

• Ubiquitous, 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

• 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 with limited television

• Cultivate strong relationships with auto dealerships, body shops, and insurance adjusters

• Hire extroverted college graduates to encourage community interaction and customer service

• Employ a highly sophisticated computer network to track its fleet

Value PropositionValue PropositionValue Proposition DistinctiveActivities

DistinctiveDistinctiveActivitiesActivities


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


Internationalization Strategy from Developing CountriesGeneral Principles

• Internationalize first in product lines or customer segments where the company has the most unique advantages

- The most important advantages will come from distinctive products, processes, and services

- Some product advantages may come from tailoring to lower income, developing country, or regional needs

- Labor costs or resource advantages are rarely sustainable

• Gain direct access to foreign markets as soon as practical rather than rely solely on intermediaries


• Prioritize markets to enter- Similar needs and segments

- Expatriates - e.g., Zee TV with Indian programming; Pollo Campero in fast food

- Over time, learn from sophisticated and demanding foreign customers

• Use alliances selectively - Use alliances as transitional strategies, not as permanent solutions

- Ensure that alliances do not block the company’s ability to gain competitive advantage and damage its own capabilities

• Locate manufacturing facilities from a regional perspective - Consolidate operations for greater efficiency and scale

• Source inputs from the lowest cost locations, not only the home country

Internationalization Strategy from Developing CountriesGeneral Principles - continued


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


The Process of Developing a Strategy

• Strategy should be developed and periodically reviewed in a formalprocess rather than being left to occur spontaneously

– The process need not be highly structured

• Strategy development is best done in a multifunctional team including the general manager and heads of important functions

• The role of strategic planning executive or department is to serve as staffto the team, not the entity responsible for strategy

• The strategy team itself should be relatively small to ensure frank and productive discussion among the leader and senior peers

– Strategy development involves tradeoffs and the exploration of options which can be misunderstood or unsettling if a large group is involved

– Other managers can be invited for particular meetings / topics

• The strategy team should conduct its work jointly rather than delegating components of the strategy to functional areas


Communicating a Strategy• Strategy involves everyone in an organization, not just management

• The benefits of strategy are greatest when it is communicated widely in the organization

• The basic strategy and value proposition must also be communicated to customers, channels, suppliers, and financial markets

– What about confidentiality?

• Managers should not assume that subordinates understand the strategy or that they agree with it

– A series of open, two way discussions is necessary to increase understanding and buy-in

• Individuals who do not ultimately accept the strategy cannot have an ongoing role in the company


Measuring a StrategyLevels of Metrics

Profitability(Relative ROIC, Growth)

Strategic Economics(Relative price, relative cost)

Value Proposition

Activity Distinctiveness

Operational/Best Practice Metrics

(e.g. Relative performance levels of distinct activities (e.g. relative quality, service, and cost at the activity

level)

(e.g. Penetration rate of chosen customers, satisfaction measures of chosen needs, relative product performance along chosen attributes)


The Role of Leaders in Strategy

• Clearly distinguish operational effectiveness from strategy

• Lead the process of choosing the company’s unique position– The choice of strategy cannot be entirely democratic

• Communicate the strategy relentlessly to all constituencies

• Maintain discipline around the strategy, in the face of many distractions.

• Decide which industry changes, technologies, and customer needs to respond to, and how the response can be tailored to the company’s strategy

• Measure progress against the strategy using metrics that capture the implications of the strategy on multiple levels

• Sell the strategy and how to measure progress to financial markets

• Commitment to strategy is tested every day


Strategy

What Is a Strategy? What is Not a Strategy?

• 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 unique value propositionversus competitors






Agenda






Corporate DiversificationLevels of Strategy

• The overall strategy of a diversified firm

– What mix of businesses should the company be in?

– How should the strategies of distinct business units be integrated and managed at the group / corporate level?

• The foundation of corporate strategy is competitive strategy

– Favorable industry structure

– Operational effectiveness

– A sound business unit strategy

Group and Corporate Strategy

Group and Group and Corporate Corporate StrategyStrategy

• How to compete in a distinct business or industryBusiness Strategy

Business Business StrategyStrategy


Relative Performance of Diversified vs. Focused Firms

Pure Diversified

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Mar

ket

to B

oo

k R

atio

Year

Hybrid

Focused

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.


ResortHotels

Motion Picture

Distribution

DirectMarketing

RetailStores

Mickey’sKitchen*

CruiseLine

The Walt Disney CompanyCorporate Strategy

TelevisionProgram-

ming DisneyChannel

FamilyMotionPictures

AnimatedFeature Films

ConsumerProducts

DisneyRecords

SportsTeam

Multi-media

Productions

Broadway Productions

Acquired Through Cap Cities / ABC Merger

Traveling Shows

Note: * Discontinued

YouthBooks andEducational

Materials

ThemeParks

•Shared characters•Shared brand•Shared family values•Cross-promotions

Miramax

HollywoodPictures

TouchstoneReal

EstateDevelop-

ment

TimeSharing

RadioStations

Television Stations

Broadway Theater

TelevisionNetwork

AdultCable

ChannelsHollywoodRecords

HyperionBooks

DiscoverMagazine

AdultPublishing / Newspapers


Ma

rg

in

M

arg

in

Creating Corporate Value Added

• Ongoing corporate competitive advantage depends heavily on interrelationships across the value chains of business units

– Transfer proprietary knowledge and skills in performing activities– Share activities across businesses


Organizing for SynergyThe Walt Disney Company

Corporate Management

• Internal development of most new businesses

• Disney name on everything• Divest where culture is inconsistent• Retain marginal units if great leverage

to the whole company• Activist corporate management

Human Resource Management

• Disney University• Norms and values reinforced in

many ways

Organizational Structure

• Three large units• Many horizontal mechanisms• Imagineering as a separate unit

Systems

• Transfer prices but intervention by top management

• Promotion usually from within• Discretionary bonus• Significant stock options


Typical Business Group in an Emerging Economy

CarDealership

CarDealership

FinancialServices

FinancialServices

SugarSugarSugar

AirlineAirline

HotelHotelHotel

Real EstateServices

Real EstateReal EstateServicesServices

ComputerWholesalerComputerComputer

WholesalerWholesaler

GroceryStores

GroceryGroceryStoresStores

Fast FoodFranchisesFast FoodFast FoodFranchisesFranchises

IndustrialParts

IndustrialParts

Imports/ DistributionImports/ Imports/

DistributionDistributionFood

ProcessingFoodFood

ProcessingProcessing

TobaccoTobacco

TextilesTextilesTextiles

• What is the corporate value added?


Why Business Groups Are So Common in Emerging Economies

• Exploit market inefficiencies and institutional weaknesses

– Financial markets

– Labor markets

– Input markets (components, support services, licensing of technologies, etc.)

• Wield greater political power

• Reduce risks in an unstable environment


Migrating Corporate Strategy in Emerging Economies

• The conglomerate group becomes less and less viable as an economy becomes more open and more competitive

– Wider access to capital and foreign partners

– More competition

– Better access to suppliers and outside institutions

– Greater need for true competitive advantages

– Limited ability to remain competitive in disparate businesses

• A heavy role in the economy for large business groups is associated statistically with lower GDP per capita

• Business groups must become more focused if they are to continue prospering

– Limit the array of businesses with a clear theme

– Grow by expanding core businesses regionally and globally rather than seeking to compete in a wide array of unrelated areas


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

Chilean market

1990 1994

Reinventing Strategy: the New Learning

Documents

Transcript of Reinventing Strategy: the New Learning