Strategy: Enduring Principles and New Directions inToday's Shifting Global Marketplace

Professor Michael E. Porter
Harvard Business School
Porter Prize Presentation
Tokyo, Japan
December 4, 2008
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); “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 orby 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. Version: November 26, 2008,6pm
20081204 – Japan Porter Price– Final.ppt

1

Copyright 2008 © Professor Michael E. Porter

How Managers Think About Competition

COMPETING
COMPETING TO
TO BE
BE THE
THE
BEST
BEST

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

20081204 – Japan Porter Price– Final.ppt

2

Copyright 2008 © Professor Michael E. Porter

Setting the Right Goals• Good strategy starts with setting appropriate 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• Profitability must be measured realistically, capturing the actual profits on thefull 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• Setting unrealistic profitability or growth targets can undermine strategy
20081204 – Japan Porter Price– Final.ppt

3

Copyright 2008 © Professor Michael E. Porter

Economic Performance versus Shareholder Value

Economic
Economic
Performance
Performance

Shareholder
Shareholder Value
Value• Sustained ROIC

• Stock Price• Sustainable Revenue
Growth• EPS• EPS Growth• Shareholder value is the result of creating real economic value• Pleasing today’s shareholders is not the goal

20081204 – Japan Porter Price– Final.ppt

4

Copyright 2008 © Professor Michael E. Porter

Determinants of Relative Performance

Differentiation(Higher Price)

Competitive
Competitive
Advantage
Advantage

Lower Cost

20081204 – Japan Porter Price– Final.ppt

5

Copyright 2008 © Professor Michael E. Porter

Foundations of Competitive Advantage
The Value Chain
Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Human Resource Management

SupportActivities(e.g. Recruiting, Training, Compensation System)

Technology Development(e.g. Product Design, Testing, Process Design, Material Research, Market Research)M(e.g. Components, Machinery, Advertising, Services)

Inbound
Logistics

Operations(e.g. Incoming
Material
Storage, Data
Collection,
Service,
Customer
Access)(e.g. Assembly,
Component
Fabrication,
BranchOperations)

Value

a

ProcurementrgOutboundLogistics

Marketing& Sales

After-Sales
Service(e.g. Order
Processing,
Warehousing,
ReportPreparation)(e.g. Sales
Force,
Promotion,
Advertising,
ProposalWriting, Web
site)(e.g. Installation,
Customer
Support,Complaint
Resolution,
Repair)inWhatbuyers arewilling topayPrimary Activities• Competing in a business involves performing a set of discrete
activities, in which competitive advantage resides
20081204 – Japan Porter Price– Final.ppt

6

Copyright 2008 © Professor Michael E. Porter

Achieving Superior Performance
Operational Effectiveness is Not Strategy

Operational
Effectiveness

Strategic
Positioning• Assimilating, attaining, andextending best practices•

Do the same thing better

20081204 – Japan Porter Price– Final.ppt

Creating a unique andsustainable competitive
position

Do things differently to achievea different purpose

7

Copyright 2008 © Professor Michael E. Porter

Five Tests of a Good Strategy•• A
A uniqueunique value
value proposition
proposition
comparedcompared toto otherother organizationsorganizations•• A
A different,
different, tailoredtailored value
value chain
chain•• Clear
Clear tradeoffs,
tradeoffs, andand choosing
choosing what
what
not
not toto dodo•• Activities
Activities inin thethe value
value chain
chain thatthat fit
fit
together
together andand reinforce
reinforce each
each
other
other
•• Strategic
Strategic continuity
continuity with
with continual
continual
improvement
improvement inin realization
realization

20081204 – Japan Porter Price– Final.ppt

8

Copyright 2008 © Professor Michael E. Porter

Strategic Positioning
IKEA, Sweden
Distinctive
Distinctive
Activities
Activities

Value
Value Proposition
Proposition• Modular, ready-to-assemble, easy to package• Young, first time, or price-sensitive buyers whowant stylish, space efficient and scalable
furniture and accessories at very low pricepoints.

•
•
•
•
•
•
•
•
•
•

20081204 – Japan Porter Price– Final.ppt

9

designsIn-house design of all products
Wide range of styles displayed in huge
warehouse stores with large on-site inventories
Self-selection
Extensive customer information in the form ofcatalogs, explanatory ticketing, do-it-yourself
videos, and 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

Copyright 2008 © Professor Michael E. Porter

Defining the Value Proposition

What
What
Customers?
Customers?

Which
Which
Needs?
Needs?

• What end users?
• What channels?

• Which products?
• Which features?
• Which services?
What
What Relative
Relative
Price?
Price?

• Premium? Discount?

• A novel value proposition often expands the market

20081204 – Japan Porter Price– Final.ppt

10

Copyright 2008 © Professor Michael E. Porter

Strategic Tradeoffs
IKEA, Sweden
TypicalTypical Furniture
Furniture Retailer
Retailer

IKEA
IKEA
Product• Low-priced, modular, ready-to-assemble
designs• No custom options

Product• Higher priced, fully assembled products• Customization of fabrics, colors, finishes,and sizes• Design driven by image, materials, varieties• Furniture design driven by cost,
manufacturing simplicity, and style
Value Chain• Centralized, in-house design of all products

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• All styles on display in huge warehouse stores• Large on-site inventories• Limited sales help, but extensive customer
information• Long hours of operation

20081204 – Japan Porter Price– Final.ppt• Traditional retail hours

11

Copyright 2008 © Professor Michael E. PorterMutually Reinforcing Activities
Zara Apparel
WordWord-ofofmouthmarketingand repeat
buyingCuttingCuttingedge fashion
at moderate
price andquality

Customers
chic butcostcostconscious
Widerange ofstylesGlobalteam oftrendspotters

Veryfrequent
productchanges

Little media
advertising

Majority of
productionin Europe

Advanced
production
machinery

Extensiveuse ofstore sales
data

Prime store
locations inhigh trafficareas
JIT delivery

Tight
coordination
with 20
wholly-owned
factories

Veryflexible
production
system• Fit is leveraging what is different to be more different
Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS
1220081204 – Japan Porter Price– Final.ppt

Copyright 2008 © Professor Michael E. Porter

Strategic Continuity• Continuity of strategy is fundamental to sustainable competitive advantage– e.g., allowing 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 fit across the value chain• Reinvention and frequent shifts in direction are costly and confuse thecustomer, the industry, and the organization• Maintain continuity in the value proposition• Continuously improve ways to realize the value proposition– Strategic continuity and continuous change should occur simultaneously. They are notinconsistent• Continuity of strategy allows learning and change to be faster and more effective

20081204 – Japan Porter Price– Final.ppt

13

Copyright 2008 © Professor Michael E. Porter

Corporate Social Responsibility
A Growing Agenda• External pressures for CSR continue to grow
• Numerous organizations monitor, rank, and report social
performance• The legal and business risks are great for companies engaging inpractices deemed unacceptable• CSR is increasingly important to business leaders, yet the concept
and its justifications remain unclear• Few companies have integrated society into strategy in a way thatreinforces competitive advantage for the business20081204 – Japan Porter Price– Final.ppt

14

Copyright 2008 © Professor Michael E. Porter

Four Prevailing Justifications for CSR
Moral Obligation“Achieving commercial success in ways that honor ethical values”• Inadequate guidance to balance complex competing social and economic interests• Wide variability of personal values among managers and stakeholders

Sustainability"Meeting the needs of the present without compromising future needs”• Most effective on environmental issues where improvements can yield immediate economic benefits• In other areas, intangible long term consequences provide a weak justification for short term costs

License to Operate“Building goodwill to secure the acquiescence of governments and stakeholders”• Licenses and approvals are necessary• But this approach cedes control of CSR agenda to external players that do not fully understandthe company’s competitive positioning, capabilities, and operations• Encourages short term, defensive, and disjointed responses to “the squeakiest wheel” of the moment

Reputation“Enhancing reputation and brand with customers, investors, and employees”• Little evidence of sustained competitive advantage• Emphasizes the visible and popular rather than the social and business impact of corporate activities• The prevailing justifications focus on the tension between business and society rather than
the interdependence• These generic rationales provide little specific guidance or priorities for company actions
20081204 – Japan Porter Price– Final.ppt

15

Copyright 2008 © Professor Michael E. Porter

Integrating Strategy and Society

SocialObjectives

Economic
Objectives• There is an inevitable link between a business and society• The health of a society depends on having competitive companies that can create
wealth and support high wages• The competitiveness of companies depends on the surrounding community− E.g., educated and skilled employees− Safe working conditions− A transparent, corruption-free business environment− A sense of equal opportunity− Low levels of environmental degradation (productive use of physical resources)• Companies can positively affect many social issues• There is a long-term synergy between economic and social objectives• To maximize this synergy, business decisions and social policies must follow the
principle of shared value– Company competitiveness and social conditions must benefit simultaneously
20081204 – Japan Porter Price– Final.ppt

16

Copyright 2008 © Professor Michael E. Porter

The Role of Business in Social Issues• Business cannot solve all of society’s problems, nor bear the cost of
doing so• Business must approach its social agenda proactively andstrategically• Business must address society and social issues where it can add themost value• Where is a company able to have the greatest impact on social issues
versus other institutions?

Social Value =20081204 – Japan Porter Price– Final.ppt

Social Benefits
Resources Expended

17

Copyright 2008 © Professor Michael E. Porter

Inside-Out Links with Society
Value Chain Social Impacts• Relationships with universities• Ethical research practices(e.g. animal testing, GMOs)• Product safety• Employee education and job
training• Safe working conditions• Diversity and discrimination• Health care and other benefits• Compensation policies• Layoff policies• Financial reporting practices• Governance practices• Transparency• Use of lobbying
Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

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

SupportActivities

Technology Development(e.g. Product Design, Testing, Process Design, Material Research, Market Research)• Procurement practices(e.g. bribery, child labor,
conflict diamonds, pricing tofarmers)• Use of particular inputs(e.g. animal fur)
• Conservation of raw materials• RecyclingM(e.g. Components, Machinery, Advertising, Services)

Inbound
Logistics(e.g. Incoming
Material
Storage, Data
Collection,
Service,
Customer
Access)Operations

OutboundLogistics(e.g. Assembly,
Component
Fabrication,
BranchOperations)

Value

a

Procurement
Marketing& Sales(e.g. Order(e.g. Sales Force,
Processing,
Promotion,
Warehousing,Advertising,
ReportProposal
Preparation)
Writing, Web
site)

r
g

After-Sales
Service(e.g. Installation,
Customer
Support,Complaint
Resolution,
Repair)inWhatbuyers arewilling topay• Disposal of obsolete products• Handling of consumables(e.g. motor oil, printing ink• Customer privacy

Primary Activities• Transportation impacts(e.g. emissions, congestion,
logging roads)• Emissions and waste• Biodiversity and ecologicalimpacts• Energy and water use• Worker safety and labor
relations• Hazardous materials• Packaging use anddisposal(e.g. McDonald’s clamshell)• Transportation impacts• Marketing and advertising (e.g. truthful
advertising, advertising to children)• Pricing practices (e.g. pricediscrimination among customers,
anticompetitive pricing practices, pricing
policy to the poor)• Consumer information• Every activity in the value chain touches on communities in the locations where acompany operates. These impacts can be positiveor negative.
18

20081204 – Japan Porter Price– Final.ppt

Copyright 2008 © Professor Michael E. Porter

Identifying Shared Value
Outside-In Social Impact on the Company• Availability of qualified human resources(Marriott’s job training)• Access to specialized training programs• Efficient physical infrastructure• Efficient permitting and regulatory practices• Availability of scientific and technologicalinstitutions (Microsoft’s Working Connections;
Nestlé’s knowledge transfer to farmers)• Sustainable access to natural resources(GrupoNueva’s water conservation)• Efficient access to capitalContext
Context forfor
Firm
Strategy
Firm Strategy
andand Rivalry
Rivalry

Factor
Factor(Input)(Input)Conditions
Conditions• Availability of local suppliers and support
services (Sysco’s locally grown produce;
Nestlé’s milk collection dairies)• Access to partner firms in related fields• Access to a cluster instead of isolated
firms and industries• Fair and open local competition (e.g., theabsence of trade barriers, fair regulations)• Intellectual property protection• Transparency (e.g., financial reporting,corruption: Extractive Industries
Transparency Initiative)• Rule of law (e.g., security, protection ofproperty, legal system)• Meritocratic incentive systems (e.g.,
antidiscrimination)

DemandDemandConditions
Conditions

RelatedRelated andandSupporting
Supporting
Industries
Industries• Nature of local demand (e.g. appeal ofsocial value propositions: Whole Foods’
customers)• Fair and demanding regulatory
standards (California auto emissions &mileage standards)• Local needs that can be served
nationally and globally (Urbi’s housing
financing, Unilever’s “bottom of the
pyramid” strategy)• Competitive context is often influenced by or inextricably linked with social conditions
Source: Michael Porter, The Competitive Advantage of Nations, 1990
20081204 – Japan Porter Price– Final.ppt

19

Copyright 2008 © Professor Michael E. Porter

Categorizing Corporate Social Issues

Generic
Social Issues

Value Chain Social
Impacts• Social issues thatare not
significantly
impacted by thecompany’s
operations, normaterially influence
its long termcompetitiveness• Social issues that are
significantly
impacted by thecompany’s activities
in the ordinary courseof businessSocial Dimensionsof Competitive
Context• Social issues in thecompany’s external
environment that
affect theunderlying driversof competitivenessin those places
where the company
operates• Which issues fall into each category will differ by business unit, company,
industry, cluster, and location
20081204 – Japan Porter Price– Final.ppt

20

Copyright 2008 © Professor Michael E. Porter

Creating a Corporate Social Agenda

Generic
Social Impacts• Good citizenshipResponsive CSR

Value Chain Social
Impacts

Social Dimensionsof Competitive
Context• Mitigate harm fromvalue chain activities• Strategic philanthropythat improves salient
areas of competitive
context• Transform value chain
activities to benefit
society while
reinforcing strategy• Create a social
dimension of the value
proposition

Strategic CSR• The impact of CSR is greatest when responsive CSR, value chain social
impacts, and investments in competitive context are integrated
20081204 – Japan Porter Price– Final.ppt

21

Copyright 2008 © Professor Michael E. Porter

Strategic Corporate Social Responsibility: ChoicePoint• ChoicePoint’s core business is providing personal identification,screening, and credit verification– e.g., employment background screening, credit verification, DNA identification,
drug testing• The company’s CSR program focuses on providing identification andverification services and advice to social organizations:– e.g., background checks of volunteers working with children– Identity verification for disaster victims– Assisting NGOs to find missing children and prevent identity theft• ChoicePoint’s CSR is aligned with its founding principle: creating asafer and more secure society through responsible use of information• ChoicePoint leverages its skills, data, technological knowledge, andstaff to maximize social benefit• CSR activities are not just charity but improve the company’s
capabilities around identity issues
20081204 – Japan Porter Price– Final.ppt

22

Copyright 2008 © Professor Michael E. Porter

Strategic CSR: Nestlé in India• Nestlé’s 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• Nestlé established local milk purchasing organizations in each town
• Nestlé invested in improving competitive context– Collection infrastructure such as refrigerated dairies was accompanied byveterinarians, 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 technicalassistance from Nestlé• Nestlé 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• Nestlé has developed a long-term competitive advantage in the milk cluster
20081204 – Japan Porter Price– Final.ppt

23

Copyright 2008 © Professor Michael E. Porter

Creating a Social Dimension of the Value Proposition• Economic and social value are complementary, especially in the medium andlong-run• Customers value social performance, not just economic performance• Companies can have the greatest social impact in areas tightly connected totheir business• Social Improvements can create shared value for the business• Companies should incorporate a social dimension to their value proposition• This social dimension can be more sustainable than conventional cost andquality advantages

20081204 – Japan Porter Price– Final.ppt

24

Copyright 2008 © Professor Michael E. Porter

Strategic Positioning
Whole Foods Markets
Distinctive
Distinctive
Activities
Activities

Value
Value Proposition
Proposition•• Natural, fresh, organic, and prepared foods andhealth items with excellent service at premium
prices••• Educated, middle class, and affluent customers
passionate about food as a part of a healthy
lifestyle

•
•
•
•
•
•
•

Well-lit, inviting supermarket store formats withappealing displays and extensive prepared foods
sections
Produce section as “theater”
Café-style seating areas with wireless internet formeetings and meals
Each store carries local produce and has the authority
to contract with the local farmers
Information and education provided to shoppers alongwith productsHigh touch in-store customer service via
knowledgeable, non-unionized, highly motivatedpersonnel
Egalitarian compensation structure
Own seafood procurement and processing facilities tocontrol 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• Excellent strategies often include a social dimension of the value proposition
20081204 – Japan Porter Price– Final.ppt

25

Copyright 2008 © Professor Michael E. Porter

The Moral Purpose of Business• The most important thing a corporation can do for society is to contribute to aprosperous economy• Only business can create wealth; other institutions in society are principally
involved in redistributing wealth or investing it to meet human needs• Business has the tools, capabilities, and resources to make a far greater
positive impact on social issues than most other institutions• Corporations depend on a healthy society to sustain competitiveness• Business is more transparent and more accountable than most foundations
and NGOs• Corporations are not responsible for all the world’s problems, nor do they
have the resources to solve them all– Business has no need to be defensive about its role in society• 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 selfsustaining solutions• Using these principles, businesses can have a greater impact on social goodthan any other institution or philanthropic organization
20081204 – Japan Porter Price– Final.ppt

26

Copyright 2008 © Professor Michael E. Porter