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COMPETING TO BE UNIQUE
The worst error in strategy is to compete with rivals on the same dimensions
Strategy as aspiration
Our strategy is to be #1 or #2 Our strategy is to grow Our strategy is to be the world leader
Strategy as vision
Our strategy is to meet our customers needs offer superior products to advance technology for mankind
Vision Statements
Autodesk Transforming business by design Avon To be the company that best understands and satisfies the product, service and self-fulfillment needs of women globally. Goodyear Tire and Rubber Become a market-focused tire company providing superior products and services to end-users and to our channel partners, leading to superior returns for our shareholders. Lafarge To be the undisputed world leader in building materials Marriott International, Inc. To be the number one lodging company in the world.
Profitability must be measured realistically, capturing the actual profits on the full investment
Profitability metrics besides ROIC (e.g., return on sales; ebitda margin; pro-forma earnings; and cash flow margin) are risky for strategy Prevalent accounting adjustments to reported profitability (e.g., writeoffs, restructuring charges) can obscure true economic performance and lead to bad competitive choices Goodwill must be treated as part of investment
Economic Performance
Shareholder Value
Sustained ROIC
Stock Price
EPS
EPS Growth
Shareholder value is the result of creating real economic value Pleasing todays shareholders is not the goal
Industry Structure
30%
30.8%
25.4%
9.6%
Reebok International
Industry Average
Paccar
Note: Invested capital less excess cash is the average of the beginning period and the ending period values. Excess cash is calculated by subtracting cash in excess of 10% of annual revenue. Source: Compustat (2007), authors analysis
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ROIC = Earnings before interest and taxes divided by invested capital less excess cash
15%
20%
25%
30%
35%
40%
45%
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Heavy price competition on standardized models Threat of New Entrants Many truck producers are assemblers
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Competitive Advantage
Lower Cost
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10
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Cents per ASM
6
Operating Cost per Available Seat Mile
0 Southwest
Note: Source:
ASM (Available Seat Miles) defined as total seats available multiplied by miles flown Airline annual reports and authors calculations
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Copyright 2007 Professor Michael E. Porter
Support Activities
Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research)
M a
Value
r g
Procurement
(e.g. Components, Machinery, Advertising, Services)
Inbound Logistics
(e.g. Incoming Material Storage, Data Collection, Service, Customer Access)
Operations
(e.g. Assembly, Component Fabrication, Branch Operations)
Outbound Logistics
(e.g. Order Processing, Warehousing, Report Preparation)
After-Sales Service
(e.g. Installation, Customer Support, Complaint Resolution, Repair)
i n
Primary Activities
Competing in a business involves performing a set of discrete activities, in which competitive advantage resides
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Support Activities
M a
r
Project Closeout
PreConstruction
Construction Management
AfterCompletion Support
g i n
Obtaining permits and licenses Site preparation Estimation of pricing, materials, and schedule Advanced ordering of materials Subcontractor contracting
Managing the client interface Architect and engineering coordination Site management Coordinating logistics Updating documentation
Site cleanup Manage subcontractors transition out of the site Preparing final documentation Client satisfaction survey
Primary Activities
There can be different ways of configuring the value chain in the same industry
Source: Interviews with Suffolk managers Note: Risk Management and Legal department are part of the firm infrastructure, but they also play a role specific to each project during the contracting phase 18 20071129 Romania - Final.ppt
Copyright 2007 Professor Michael E. Porter
Operational Effectiveness
Strategic Positioning
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A unique value proposition compared to other organizations A different, tailored value chain Clear tradeoffs, and choosing what not to do Activities that fit together and reinforce each other Strategic continuity with continual improvement in realizing the strategy
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Strategic Positioning
Enterprise Rent-A-Car
Value Proposition
Home-city replacement cars for drivers whose cars are being repaired or who need an extra vehicle, at low rates (30% below airport rates)
Distinctive Activities
Numerous, small, inexpensive offices in each
metropolitan area, including on-premises offices at major accounts
Open during daylight hours Deliver cars to customers homes or rental sites, or
deliver customers to cars
In-house reservations Grassroots marketing with limited television Cultivate strong relationships with auto
dealerships, body shops, and insurance adjusters
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What Customers?
What end users? What channels?
Which Needs?
Which products? Which features? Which services?
What Relative Price?
A novel value proposition can also grow the pie/expand the industry
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Strategic Positioning
IKEA, Sweden
Value Proposition
Young, first time, or price-sensitive buyers who
want stylish, space efficient and scalable furniture and accessories at very low price points.
Distinctive Activities
Modular, ready-to-assemble, easy to package
designs In-house design of all products Wide range of styles in huge warehouse stores with large on-site inventories Self-selection Extensive customer information in the form of catalogs, explanatory ticketing, do-it-yourself videos, and assembly instructions Use Ikea designer names on products to inform coordinated purchases Child care provided in the store On-site, low-cost, restaurants Long hours of operation Suburban locations with large parking lots Principally self-delivery by customers
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Strategic Positioning
GOL Airlines, Brazil
Value Proposition
Convenient, no-frills airline service between 41
Brazilian and nearby international cities at very low prices competing with bus transportation
Distinctive Activities
No-frills service
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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
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Strategic Tradeoffs
Neutrogena Soap (1990)
skin research
television
some distribution channels
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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 simplicity, and style Value Chain
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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Critical Resources
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Strategic Continuity
Continuity of strategy is fundamental to sustainable competitive advantage
e.g., allows the 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 the fit across the value chain
Reinvention and frequent shifts in direction are costly and confuse the customer, the industry, and the organization
Maintain continuity in the value proposition Successful companies continuously improve in how they realize their value proposition
Strategic continuity and continuous change should occur simultaneously. They are not inconsistent
Continuity of strategy allows learning and change to be faster and more effective
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Barriers to Strategy
Flawed Management Concepts
Misunderstanding of strategy itself Poor industry definition
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
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Rapid turnover of leadership undermines strategic direction to achieve short-term performance benefits A desire for consensus blurs strategic tradeoffs Inappropriate cost allocation leads to too many products, services, or customers
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Prior to the 1990s 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-1990s, 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 Galldermas 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.
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Strategic Positioning
Whole Foods Markets
Value Proposition
Natural, fresh, organic, and prepared foods and health items with excellent service at premium prices Educated, middle class, and affluent customers passionate about food as a part of a healthy lifestyle
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 Information and education provided to shoppers along with products High touch in-store customer service via knowledgeable, non-unionized, highly motivated personnel Egalitarian compensation structure Own seafood procurement and processing facilities to control quality (and price) from the boat to the counter Donates 5% of profits to non-profits Each store has green projects, directed by employees to improve environmental performance
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Strategic CSR
ChoicePoint
ChoicePoints core business is providing personal identification, screening, and credit verification
e.g., access to ChoicePoint databases, employment background screening, credit verification, DNA identification and authentication, drug testing, etc.
The companys CSR program focuses on providing services and advice to social organizations:
e.g., Background checks of volunteers working with children such as Boys & Girls Club volunteers Identity verification for Katrina victims Assisting NGOs to find missing children and prevent identity theft
ChoicePoint leverages its skills, data, technological knowledge, and staff to maximize social impact Its CSR approach is aligned with ChoicePoints founding principle: creating a safer and more secure society through responsible use of information CSR activities improve the companys capabilities around identity issues
Working with social organizations helps develop new methodologies and capabilities
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Strategic CSR
Nestl in India
Nestls entered the poor Moga region of India in 1962 Local milk supply was hampered by small parcels of land, poor soil, periodic droughts, animal disease, and lack of a commercial market Nestl established local milk purchasing organizations in each town Nestl invested in improving competitive context
Collection infrastructure such as refrigerated dairies was accompanied by veterinarians, nutritionists, agronomists, and quality assurance experts to assist small farmers Medicines and nutritional supplements were provided to improve animal health Monthly training sessions were held for local farmers Wells to secure water supply for animals were dug with financing and technical assistance from Nestl
Nestl has built a productive milk cluster in Moga, buying milk from more than 75,000 farmers through 650 local dairies
Moga has dramatically improved social conditions Nestl has developed a long-term competitive advantage in the milk cluster
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Strategy
What Is a Strategy?
A unique value proposition versus competitors A different, tailored value chain Clear tradeoffs, and choosing what not to do Activities that fit together and reinforce each other Continuity of strategy with continual improvement in realizing the strategy
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Strategy development is best done in a multifunctional team including the general manager and heads of important functions The role of the strategic planning executive or department is to serve as staff to the team, not be responsible for strategy development The strategy team itself should be relatively small to ensure frank and productive discussion between the leader and senior peers
Strategy development involves making tradeoffs and exploring options that can be unsettling and disruptive if lower level people are involved Other managers can be invited for particular meetings/input
The strategy team should conduct its work jointly rather than delegating components of the strategy to functional areas
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Communicating a Strategy
Strategy involves everyone in an organization, not just top management
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 companys unique position
Symbols of the strategy are invaluable tools Repetition
The basic strategy and value proposition must also be communicated to customers, channels, suppliers, and financial markets
What about confidentiality?
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
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Clearly distinguish operational effectiveness improvement and strategy Communicate the strategy relentlessly to all constituencies
Harness the moral purpose of strategy
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 companys strategy Measure progress against the strategy using tailored metrics that capture the implications of the strategy for serving customers and performing particular activities Sell the strategy and how to evaluate progress to the financial markets
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The most important thing a corporation can do for society is to contribute to a prosperous economy
Only business can create wealth; other institutions in society are principally involved in redistributing wealth or investing it to meet human needs Corporations are not responsible for all the worlds problems, nor do they have the resources to solve them all
Business has no need to be defensive about its role in society
Business has the tools, capabilities, and resources to make a far greater positive impact on social issues than most other institutions Business is more transparent and more accountable than most foundations and NGOs
Each company can and should identify the particular set of societal problems that it is best equipped to help resolve, and from which it can gain the greatest competitive benefit
Addressing social issues through shared value strategies will lead to self-sustaining solutions
Using these principles, businesses can have a greater impact on social good than any other institution or philanthropic organization
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Copyright 2007 Professor Michael E. Porter