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Strategy: Creating and Sustaining Competitive Advantage Strategy: Creating and Sustaining Competitive Advantage Professor Michael E. Porter Harvard Business School Mumbai, May 24th, 2017 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); On Competition (Harvard Business Review, 2008); and “Creating Shared Value” (Harvard Business Review, Jan 2011). 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. For further materials, see the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu, and FSG website, www.fsg.org. Thinking Strategically COMPETING COMPETING TO BE THE BEST TO BE UNIQUE • There is no one best way to compete • The worst error in strategy is to compete with rivals on the same dimensions 20170524—Strategy India Session 2 Copyright 2017 © Professor Michael E. Porter What Do We Mean by a Strategy? • Strategy is the set of long term choices that an organization makes to distinguish itself from competitors • Strategy defines a company’s distinctive approach to competing, and the competitive advantages on which it will be based • Strategy is different than aspirations – “Our strategy is to be #1 or #2…” – “Our strategy is to grow…” • Strategy is more than particular actions – “Our strategy is to merge…” – “Our strategy is to cut costs…” • Strategy is not the same as mission / values – “Our strategy is to serve our customers and communities while meeting the highest standards of integrity…” 20170524—Strategy India Session 3 Copyright 2017 © Professor Michael E. Porter Economic Performance Versus Shareholder Value Economic Shareholder Performance Value • Sustained ROIC • EPS growth • Sustainable revenue • TSR growth • Shareholder value is the result of creating real economic value 20170524—Strategy India Session 4 Copyright 2017 © Professor Michael E. Porter Levels of Strategy Corporate Strategy • Strategy for the overall company competing in multiple business Business Strategy • How to compete in each distinct business 20170524—Strategy India Session 5 Copyright 2017 © Professor Michael E. Porter Business Strategy Drivers of Business Unit Performance Industry Strategic Positioning Structure Within the Industry - Nature of Industry Competition - Sustainable Competitive Advantage • Business units need to focus both on the attractiveness of their industry as well as their own competitive position 20170524—Strategy India Session 6 Copyright 2017 © Professor Michael E. Porter Analyzing Industry Structure Threat of Substitute Products or Services Bargaining Power Rivalry Among Bargaining Power of Suppliers Existing of Buyers Competitors Threat of New Entrants • Part of strategy is to drive a positive transformation in industry structure 20170524—Strategy India Session 7 Copyright 2017 © Professor Michael E. Porter Industry Structure and Positioning U.S. Heavy Trucks Threat of Substitute Products or Services • Railroads • Water transportation Rivalry Among Bargaining Power Bargaining Power Existing of Suppliers of Buyers Competitors • Large, independent, • Vigorous price • Trucking company branded suppliers competition on consolidation into large of engines and drive standard models fleets train components • Large leasing companies • Rising environmental account for substantial truck • Unionized labor and energy efficiency volume requirements • Small owner operators account for about 30% of Threat of New the market Entrants • Limited entry barriers for assemblers • Significant barriers to assembling a dealer and service network 20170524—Strategy India Session 8 Copyright 2017 © Professor Michael E. Porter Analyzing Industry Structure Industrial Gases Threat of Substitute Products or Services • Captive production by customers Rivalry Among Bargaining Power Bargaining Power Existing of Suppliers of Buyers Competitors • Gas producers are price • The products are • Customers often have buying takers for feedstocks and commodities power energy Threat of New Entrants • The products are commodities 20170524—Strategy India Session 9 Copyright 2017 © Professor Michael E. Porter Analyzing Industry Structure Industrial Gases Threat of Substitute Products or Services • Captive production by customers • Captive production widely managed by industrial gas companies Rivalry Among Bargaining Power Bargaining Power Existing of Suppliers of Buyers Competitors • Gas producers are price • The products are • Customers often have buying takers for feedstocks and commodities power energy • High transport costs create • Gases are a small part of total • Contracts pass through benefits of customer density cost but significant to customer input costs and mitigate rivalry productivity • Switching costs are often Threat of New significant due to long-term Entrants contracts and on-site facilities • The products are commodities • Need for customer density raises the share needed to be viable 20170524—Strategy India Session 10 Copyright 2017 © Professor Michael E. Porter Achieving Superior Profitability Within an Industry Differentiation (Premium Price) Competitive Advantage Lower Cost 20170524—Strategy India Session 11 Copyright 2017 © Professor Michael E. Porter Competitive Advantage and the Value Chain Firm Infrastructure (e.g., Financing, Planning, Investor Relations) Human Resource Management Support (e.g., Recruiting, Training, Compensation System) Activities Technology Development (e.g., Product Design, Process Design, Market Research) M Value Procurement a (e.g., Services, Machines, Advertising, Data) r What g buyers are Inbound Operations Outbound Marketing After-Sales i willing to Logistics Logistics & Sales Service pay n (e.g., Customer (e.g., Branch (e.g., Order (e.g., Sales (e.g., Installation, Access, Data Operations, Processing, Force, Customer Collection, Assembly, Warehousing, Promotion, Support, Incoming Component Report Advertising, Complaint Material Fabrication) Preparation) Proposal Resolution, Storage, Writing, Repair) Service) Website) Primary Activities • The value chain is the set of activities involved in delivering value to customers • Strategy is reflected in the choices about how activities are configured and linked together 20170524—Strategy India Session 12 Copyright 2017 © Professor Michael E. Porter Competitive Advantage and the Value Chain Mobile Communications Firm Infrastructure (e.g., financing, planning, investor relations) Human Resource Management Support (e.g., recruiting, training, compensation system) Activities Technology Development (e.g., service/ offer, network design, market research) M Value Procurement a (e.g., equipment, equipment access (e.g. towers), backhaul, roaming, data) r What g buyers are Device Network Pricing and Marketing After-Sales willing to Coverage Operations Order & Sales Service i pay and Service Processing n Content (e.g., network (e.g., plans, billing, (e.g. advertising, (e.g., customer (e.g., devices construction, credit, customer promotion, onboarding, supported, operations, interface, other channels, online customer ancillary enhancement, services) channel, support, security, applications roaming, customer complaint (home security wholesaling, acquisition, resolution, cameras), security) sales force) technical support security/ privacy) and repair) Primary Activities • The value chain is the set of activities involved in delivering value to customers • Strategy is reflected in the choices about how these activities are configured and linked together 20170524—Strategy India Session 13 Copyright 2017 © Professor Michael E. Porter Operational Effectiveness Versus Strategic Positioning Operational Strategic Effectiveness Positioning • Assimilating and extending • Creating a unique best practices competitive position Doing the same things better Doing things differently 20170524—Strategy India Session 14 Copyright 2017 © Professor Michael E. Porter Tests of a Successful Strategy • A unique value proposition versus competitors 20170524—Strategy India Session 15 Copyright 2017 © Professor Michael E. Porter Defining the Value Proposition What Which Needs? Customers? • What end users? • Which products? • What channels? • Which features? • Which services? What Relative Price? • Premium? Parity? Discount? • Finding a unique value proposition often involves identifying new needs, new ways of segmenting, or innovation in the product • A novel value proposition often expands the market 20170524—Strategy India Session 16 Copyright 2017 © Professor Michael E. Porter Strategic Positioning IKEA, Sweden Value Proposition • Customers with smaller living spaces, who are style and design conscious, but have a limited budget • A wide line of stylish, functional and good quality furniture and accessories • Limited ancillary services • Very low price points 20170524—Strategy India Session 17 Copyright 2017 © Professor Michael E. Porter Strategic Positioning PACCAR Value Proposition • Highly customized trucks targeted at owner- operators, offering superior amenities but low cost of operation along with extensive customer after sale support • Command a 10% premium price 20170524—Strategy India Session 18 Copyright 2017 © Professor Michael E. Porter Tests of a Successful Strategy • A unique value proposition versus competitors • A distinctive value chain, involving clear choices
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