Strategic Positioning

Creating Shared Value: Strategy in the Post-Crisis Era
Professor Michael E P t P f Mi h l E. Porter Harvard Business School Madrid ExpoManagement June 16, 2010
This presentation draws on ideas from Professor Porters books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (Th F Ad t (The Free P Press, 198 ) Wh i S 1985); What is Strategy? (H ? (Harvard B i d Business R i Review, N /D 1996) S Nov/Dec 1996); Strategy and the I d h Internet (H (Harvard B i d Business Review, March 2001) and On Competition (Harvard Business Review, 2008). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Michael E. Porter. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: June 15, 2010
20100616 MadridExpomanagement.ppt
Copyright 2010 Professor Michael E. Porter
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
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 gy
Economic Performance versus Shareholder Value
Economic Performance
Shareholder Value
Sustained ROIC Sustainable Revenue Growth
Stock Price EPS Multiple EPS Growth
Shareholder value is the result of creating real economic value Pleasing todays shareholders is not the goal today s
Determinants of Superior Performance
Differentiation (Higher Price)
Competitive C titi Advantage
Lower Cost
Competitive Advantage and the Value Chain

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

Support Activities (e.g. Recruiting, Training, Compensation System)
Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research)
M a r g
Value What buyers are willing to pay
Procurement
(e.g. Components, Machinery, Advertising, Services)
Inbound Logistics
(e.g. Incoming Material Storage, Data g , Collection, Service, Customer Access)
Operations
(e.g. Assembly, Component Fabrication, Branch Operations)
Outbound Logistics
(e.g. Order Processing, Warehousing, g, Report Preparation)
Marketing & Sales

(e.g. Sales Force, Promotion, , Advertising, Proposal Writing, Web site)
After Sales After-Sales Service

(e.g. Installation, Customer Support, pp , Complaint Resolution, Repair)
i n
Primary Activities
All competitive advantage resides in the value chain. Strategy is p g gy manifested in how activities in the value chain are configured and linked together
Achieving Superior Performance

Operational Effectiveness is Not Strategy
Operational Effectiveness
Strategic Positioning
Assimilating, attaining, and extending best practices
Creating a unique and sustainable competitive position
Do the same thing better
Do things differently to achieve a different purpose
Five Tests of a Strategy
A unique value proposition compared t other organizations d to th i ti A different, tailored value chain Clear tradeoffs, and choosing what not to do Activities in the value chain that fit g together and reinforce each other Strategic continuity with continual improvement in realization
IKEA, Sweden
Value Proposition

Distinctive Activities
Modular, ready-to-assemble, easy to package designs In-house design of all products Wide range of styles displayed in huge warehouse stores with large on site inventories on-site Self-selection Extensive customer information in the form of catalogs, explanatory ticketing, do-it-yourself videos, and y assembly instructions Ikea designer names attached to related products to inform coordinated purchases Long hours of operation Suburban locations with large parking lots On-site, low-cost, restaurants Child care provided in the store Self-delivery by most customers
Young, first time, or price-sensitive buyers Stylish, space efficient and scalable furniture and accessories at very low price points.
Defining the Value Proposition
What Wh t Customers?
Which Needs?
What end users? What channels?

What Relative Price?
Which products? Which features? Which services?
Premium? Discount?
A novel value proposition often expands the market
10
Nespresso
Value Proposition Distinctive Activities
Uniquely high quality, easy to prepare espresso coffee at a premium price Demanding convenience-sensitive, Demanding, con enience sensiti e affluent consumers and offices
Extra-high quality ground coffee in 16+

varieties Individually proportioned capsules for freshness and ease of use Tailored espresso machines manufactured to specifications by highend machine vendors Capsules sold only online or through about 200 coffee boutique shops in major cities, cities not in mass market food channels Uses the Nespresso Club to achieve high levels of communication with customers Focused image-oriented media image oriented advertising
11
Five Tests of a Strategy
A unique value proposition compared t other organizations d to th i ti A different, tailored value chain Clear tradeoffs, and choosing what not to do Activities in the value chain that fit g together and reinforce each other Strategic continuity with continual improvement in realization
12
Strategic Tradeoffs
IKEA, Sweden
IKEA
Product Low-priced, modular, ready-to-assemble designs No custom options Furniture design driven by cost, manufacturing g y , g simplicity, and style Value Chain Centralized, in-house design of all p , g products All styles on display in huge warehouse stores Large on-site inventories g Limited sales help, but extensive customer information Long hours of operation
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
13
Mutually Reinforcing Activities

Ikea
Suburban locations with ample parking Instructions and support for customer assembly High traffic store layout Explanatory catalogs, informative displays and labels More impulse buying
Self delivery and assembly by most customers t

Increased likelihood of follow-on purchase
Limited Sales Staffing
Selfselection by customer
Ample inventory on site
Ease of transport and t t d assembly
Complete line of p furniture and accessories to furnish home
Designer identification of compatible lines Year-round Year round stocking to even out production
Modular, scalable furniture designs

Knock-down kit packaging
In-house design focused on cost of manufacturing
Low manufacturing cost

100 percent sourcing from long-term long term suppliers
High variety, but ease of manufacturing
Fit is leveraging what is different to be more different

14
Strategic Continuity
Continuity of strategy is fundamental to sustainable competitive advantage
e.g., allows the organization to understand the strategy build truly unique skills and assets related to the strategy establish a clear identity with customers, channels, and other outside entities strengthen fit across the value chain
Reinvention and frequent shifts in direction are costly and confuse the customer, the industry, and the organization
M i t i continuity i th value proposition Maintain ti it in the l iti Continuously improve ways to realize the value proposition
St t i continuity and continuous change should occur simultaneously. Th are not Strategic ti it d ti h h ld i lt l They t inconsistent
Continuity of strategy allows learning and change to be faster and more effective
15
Growing Social Challenges

External pressures for corporate social responsibility continue to grow Many companies are engaged in an unprecedented range of CSR activities While the legitimacy of business continues to erode Most companies treat CSR and community issues as separate from their core business agenda Company practice in CSR leaves much room for improvement
Unfocused Reactive PR-driven Limited impact Hard to sustain
Yet concern with social issues will be a defining characteristic of the post-crisis era
16
The Boundaries of Capitalism
Company C Profitability and Growth
Social d S i l and Economic Development
Narrow cost minimization Ease of outsourcing, relocating, and globalizing Shortening time horizons Tradeoff mindset
17
Sources of Competitive Advantage: New Learning

Employee Education and Skills
Poverty in aC Companys Community
Worker Safety
Environmental Impact
Company Productivity P d ti it
Gender Equity
Energy Use
Employee Health Water Use
Social deficits create economic cost External conditions shape company productivity
18
The Concept of Shared Value

Shared Value: Corporate policies and practices that enhance the competitiveness of the company while simultaneously advancing economic and social conditions in the communities in which it operates
Fi d and expand th congruence b t Find d d the between economic and societal objectives, i d i t l bj ti rather than assume tradeoffs or the need for redistribution
Driven by value creation thinking
Shared value arises from a deeper understanding of the drivers of competitiveness and competitive advantage
The opportunities are growing
Achieving shared value requires new operating practices, new technologies, technologies and new approaches to competing
19
Shared Value vs. CSR
CSR
CSV
Values: doing good Philanthropy Selfless Discretionary Agenda externally determined Separate from profit maximization Limited (CSR) budget
Value: economic and social benefits relative to cost Joint value creation Mutual benefits for the company p y Integral to competing Company specific / internally generated Integral to profit maximization Total budget
Example Fair trade
Example Transforming procurement to increase quality and yield
In either case, compliance with regulations and good corporate practice is assumed.
20
Levels of Shared Value
Reconfigure the value chain using shared value to drive productivity
Create products that meet social needs
Build clusters and a supportive local external context to enhance pp productivity and create self-reinforcing economic development
21
Reconstructing the Value Chain

Enhanced procurement to support vendor quality, efficiency, and price y, p realization Sourcing locally Local and small vendor development Purchasing transparency
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)
M a r g
Procurement
(e.g. Components, Machinery, Advertising, Services)
Inbound g Logistics
(e.g. Incoming Material Storage, Data Collection, Service, Customer Access)
Operations
(e.g. Assembly, Component Fabrication, Branch Operations)
Outbound g Logistics
Marketing & Sales
After-Sales Service
(e.g. Installation, Customer Support, Complaint Resolution, Repair)
i n
Recruiting from diverse and disadvantaged communities Employee education and job training Enhancing employee health Modifying compensation and benefit practices for lower income workers Enhancing retention Process transformation
(e.g. Order (e.g. Sales Force, Processing, Promotion, Warehousing, Advertising, Report Proposal Preparation) Writing, Web site)
Limiting logistical intensity g g y and impacts
Recycling and reuse of products Remote services Packaging use and disposal Limiting logistical intensity Local channel development Marketing nutrition, safety, and low environmental impact Pricing models for lower income customers Sustainable credit policies
Local processing Limiting emissions and waste Minimizing use of hazardous materials Better energy and water use Worker safety Upskilling
The greatest opportunities for shared value are in activities most salient to a companys particular business Some opportunities will be generic to many companies, and become new best practices company s Some opportunities to create shared value will create competitive advantage and reinforce a companys strategy
22
The Social Dimension of Products

Most products and services address not just economic but social needs, such as:
Environmental impact Safety Health and nutrition Savings / sound financing Inclusion Education
There is new awareness of underserved needs in disadvantaged and developing markets

Bottom of the Pyramid Reverse product innovation
Markets are rapidly growing for social products

A new generation of social entrepreneurs are embracing market principles Corporations have largely sat on the sidelines p g y
23
Creating a HealthyLocal Clusters Building Business Environment

Improving Deficits in the Business Environment
Availability of qualified human resources Access to appropriate education and training programs relevant to the business Availability of efficient logistical infrastructure Availability of credit for local organizations Local research on products and processes addressing l dd i local needs l d Local market organization and price transparency Fair local competition (e.g., the absence of trade barriers and market distortions) Regulatory structure (e.g., land use, resource use)
Context for Firm Strategy Strateg and Rivalry
Factor (Input) Conditions
Demand Conditions
Availability of capable local suppliers and support services Cooperates and business groups to enable collaboration
Related and Supporting Industries
Product standards meeting the needs of local customers Availability of local distribution channels Quality certification organizations
Deficits in the business environment create internal costs A strong local cluster enables productivity
Source: Michael Porter, The Competitive Advantage of Nations, 1990
24
Creating Shared Value

Nestl
Nutrition
Water
Rural Development
25
Adding a Social Dimension to Strategy

Customers and business partners value social performance, not just economic performance Companies can have the greatest societal impact in areas tightly connected to their business
This is where societal performance and economic p p performance intersect most closely
Societal improvements create shared value that drive the competitiveness of the business
Companies should incorporate a social dimension to their value proposition Shared value can reinforce the companys unique strategic positioning This social dimension of strategy can be more sustainable than conventional cost and quality advantages
26
Shared Value and Strategic Positioning

Whole Foods Markets
Value Proposition
Natural, fresh, organic, and prepared foods and health items with excellent service at premium prices Cater to specialized nutritional requirements (gluten allergies, vegan, etc.) Educated, middle class, and affluent customers who are passionate about food and 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. Company provides low-interest loans if needed. Microcredit in supplier communities Information and education provided to shoppers along with products High touch in-store customer service via knowledgeable, flexible, and highly motivated personnel Flat compensation structure Own seafood procurement and processing facilities to control q quality ( y (and p price) from the boat to the counter ) Heavy emphasis on environmental sustainability. Each store has green projects, directed by employees to improve environmental performance All in-store materials are biodegradable no plastic bags available and customers given discounts for reusable bags Emphasis on supporting community development
Successful future strategies will include social dimensions

27
The Purpose of Business

There is an opportunity to transform thinking and practice about the role of the corporation in society, using the concept of shared value Shared value arises from a deeper understanding of doing business that transcends narrower conceptions of economic efficiency that have guided company operations Shared value thinking will provide new catalysts for global economic growth and the next wave of innovation and productivity in the global economy Businesses acting as businesses, not as charitable givers are arguably the businesses givers, most powerful force for addressing many pressing issues facing our society A transformation of business practice around shared value will give purpose t f ti fb i ti d h d l ill i to the corporation and to capitalism itself, and represents our best chance to legitimize business again
28
Strategy in Economic Downturns

Create a positive agenda Refocus on strategy Return to economic fundamentals Downsize to a strategy, not across the board Do not overreact to distressed industry conditions Use the downturn to get things done that would be more difficult in normal times Position for long term economic performance, not near term stock price S i opportunities f di Seize t iti for discontinuities which are more lik l t emerge ti iti hi h likely to
Strategy is more important in downturns, not less

29
Backup
30
Mutually Reinforcing Activities

Ikea
Ample inventory on site Suburban or high-access locations High traffic store layout
Large stores with ample parking Self delivery by most customers
Limited instore sales help Year round Year-round stocking to even out production
Self-selection by y the customer In-house design of product families
Designer identification of compatible lines
100 percent sourcing from long-term long term suppliers
Low manufacturing costs
Modular, design approach with attractive styles and materials
High variety, but ease of manufacturing
Fit is leveraging what is different to be more different

31

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Creating Shared Value: Strategy in the Post-Crisis Era

Copyright 2010 Professor Michael E. Porter

COMPETING TO BE THE BEST

Copyright 2010 Professor Michael E. Porter

Setting the Right Financial Goals

Setting unrealistic profitability or growth targets can undermine strategy gy

Copyright 2010 Professor Michael E. Porter

Economic Performance versus Shareholder Value

Sustained ROIC Sustainable Revenue Growth

Stock Price EPS Multiple EPS Growth

Copyright 2010 Professor Michael E. Porter

Determinants of Superior Performance

Differentiation (Higher Price)

Competitive C titi Advantage

Copyright 2010 Professor Michael E. Porter

Competitive Advantage and the Value Chain

Human Resource Management

Value What buyers are willing to pay

Marketing & Sales

After Sales After-Sales Service

Copyright 2010 Professor Michael E. Porter

Achieving Superior Performance

Assimilating, attaining, and extending best practices

Creating a unique and sustainable competitive position

Do the same thing better

Do things differently to achieve a different purpose

Copyright 2010 Professor Michael E. Porter

Five Tests of a Strategy

Copyright 2010 Professor Michael E. Porter

Copyright 2010 Professor Michael E. Porter

Defining the Value Proposition

What end users? What channels?

Which products? Which features? Which services?

A novel value proposition often expands the market

Copyright 2010 Professor Michael E. Porter

Extra-high quality ground coffee in 16+

Copyright 2010 Professor Michael E. Porter

Five Tests of a Strategy

Copyright 2010 Professor Michael E. Porter

Typical Furniture Retailer

Copyright 2010 Professor Michael E. Porter

Mutually Reinforcing Activities

Self delivery and assembly by most customers t

Limited Sales Staffing

Ample inventory on site

Ease of transport and t t d assembly

Complete line of p furniture and accessories to furnish home

Modular, scalable furniture designs

In-house design focused on cost of manufacturing

Low manufacturing cost

High variety, but ease of manufacturing

Fit is leveraging what is different to be more different

Copyright 2010 Professor Michael E. Porter

Copyright 2010 Professor Michael E. Porter

Growing Social Challenges

Copyright 2010 Professor Michael E. Porter

The Boundaries of Capitalism

Company C Profitability and Growth

Social d S i l and Economic Development

Copyright 2010 Professor Michael E. Porter

Sources of Competitive Advantage: New Learning

Poverty in aC Companys Community

Employee Health Water Use