Now What Is Strategy

What is Strategy?
Professor Michael E. Porter

Harvard Business School
University of Iceland
October 2, 2006
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 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.
Copyright 2006 © Professor Michael E. Porter

How Managers Think About Competition
COMPETING
COMPETING TO
TO BE
BE THE
THE COMPETING
COMPETING TO
TO BE
BE
BEST
BEST UNIQUE
UNIQUE
• The worst error in strategy is to compete with rivals on the same dimensions
20061002 University of Iceland 20060925.ppt 3 Copyright 2006 © Professor Michael E. Porter

Flawed Concepts of Strategy
• 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 action
– “Our strategy is to merge…”
– “… internationalize…”
– “… consolidate the industry…”
– “… outsource…”
• Strategy as vision
– “Our strategy is to meet our customers’ needs…”
– “…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.

Setting the Right Goals
• 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
• 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; cash flow margin) are
risky for strategy
• Prevalent accounting adjustments to reported profitability

(e.g., writeoffs, writedowns, 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
Economic Performance versus Shareholder Value
Economic
Economic Shareholder
Shareholder Value
Value
Performance
Performance
Economic Performance Measures Shareholder-Derived Measures

• Sustained ROIC •Stock Price
• Sustained Revenue Growth • EPS
• EPS Growth
• Shareholder value is the result of creating real economic value

• Pleasing today’s shareholders is not the goal
Stock Price and Economic Value Over Time
Taiwan Semiconductor, 2000 – 2005
2000 2001 2002 2003 2004 2005
Revenue ($B) $5.3 $3.9 $4.7 $5.9 $7.6 $8.2
Net Inc. Margin 39.2% 11.5% 13.3% 23.3% 35.9% 35.1%
ROE 32.2% 5.5% 7.7% 15.4% 25.4% 22.2%
ROE moving avg. 29.4% 21.4% 17.1% 16.1% 17.2% 15.2%
ROC 25.8% 5.7% 6.8% 13.3% 23.2% 21.4%
ROC moving avg. 23.2% 16.7% 13.5% 13.4% 15.0% 14.1%
$24
$24
$19
Stock
Price $14
(US$)
$9
$4
2000 2001 2002 2003 2004 2005
Note: Moving averages are over the past 5 years. Return on Equity calculated as net income for the past 12 months divided by common stockholder equity (adjusted for stock splits). Return
on Capital calculated as EBIT / (capital employed plus short-term loans minus intangible assets). Sales converted from New Taiwan Dollars at average yearly rate.
Source: Compustat; Bloomberg; author’s calculations.
Setting the Right Goals
Food Retailing
1.6
Whole Foods
1.4
1.2
Market
Value to 1.0 Average
Sales Ratio Food Retailing Publix
2004 Data 0.8 ROIC
0.6
0.4
Winn-
Dixie Kroger Safeway
Average Food
0.2 Albertson’s Supervalu Retailing Market Value
to Sales Ratio
Food Lion
0.0
0% 5% 10% 15% 20% 25%
ROIC Average
Source: Compustat (1999-2004)
Note: ROIC calculated as EBIT divided by Average Invested Capital (Total Assets less Excess Cash less Current Operating Liabilities)
Understanding Economic Performance
• 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:

Good Business Good Position
Relative
Relative Position
Position
Industry
Industry Within
Within the
the
Structure
Structure Industry
Industry
- Overall Rules of Competition - Sources of Competitive Advantage
• Strategy must encompass both

Economics of Strategy
Disaggregating Economic Performance
30%
28.14%
25%
Return on 20%
Invested 19.55%
Capital
1985-2002 15%
12.75%
10%
5% 5.05%
0%
Pharmacia & Upjohn* Southwest Airlines
Industry Average
Source: Compustat
Note: 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
Determinants of Long-Term Industry Profitability
Threat of Substitute
Products or Services
Bargaining Power Rivalry Among Bargaining Power

of Suppliers Existing of Buyers
Competitors
Threat of New
Entrants

Reshaping Industry Structure
Foodservice Distribution
• Offering value-added services
• Offering private-label products
• Moving to national procurement contracts
• Increasing the use of sophisticated information technology

Determinants of Relative Performance
Differentiation
(Higher Price)
Competitive
Competitive
Advantage
Advantage
Lower Cost

Economics of Strategy
Southwest Airlines
Revenue and Cost per Available Seat Mile, Average of 1998 - 2000
12
Operating Profit per

Pricing
10 Available Seat Mile
Differential:
1.72
Cost
Advantage:
8 2.44
Cents
per ASM
6
Operating Cost per
Available Seat Mile
0
Southwest Airline Industry Average
Note: ASM (Available Seat Miles) defined as total seats available multiplied by miles flown
Source: Airline annual reports and author’s calculations
Sources of Competitive Advantage
Activities 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, Testing, Process Design, Material Research, Market Research) M
Value
Procurement a
(e.g. Components, Machinery, Advertising, Services) r What
g buyers are
Inbound Operations Outbound Marketing After-Sales i
willing to
Logistics Logistics & Sales Service pay
n
(e.g. Incoming (e.g. Assembly, (e.g. Order (e.g. Sales (e.g. Installation,
Material Component Processing, Force, Customer
Storage, Data Fabrication, Warehousing, Promotion, Support,
Collection, Branch Report Advertising, Complaint
Service, Operations) Preparation) Proposal Resolution,
Customer Writing, Web Repair)
Access) site)
Primary Activities
• Competing in a business involves performing a set of discrete

activities, in which competitive advantage resides
Defining the Value Chain
Homebuilding
Firm Infrastructure

Activities
(e.g. Product Design, Testing, Process Design, Materials Research, Market Research) M
Value
Procurement a
(e.g. Materials, Subcontracted Labor, Advertising, Services) r What
g buyers are
Land Acquisition Construction Marketing Closing After-Sales i
willing to
& Development & Sales Service pay
n
(Identify attractive (Design, (Lead generation, (e.g. Customer (e.g. Warranties,
markets, Secure Engineering, Model home Financing, Customer
land, Procure Schedule and display, Sales Contract, Title, Complaints)
entitlements and manage force, Customer Closing)
permits, Prepare construction selection of
site) process) personalized
options)
Primary Activities

Achieving Superior Performance
Operational Effectiveness is Not Strategy
Operational Strategic
Effectiveness Positioning
• Assimilating, attaining, and • Creating a unique and

extending best practices sustainable competitive
position
Run the same races faster Choose to run a different race

Five Tests of a Good Strategy
•• A
A unique
unique value
value proposition
proposition
compared
compared to
to other
other organizations
organizations
•• A
A different,
different, tailored
tailored value
value chain
chain
•• Clear
Clear tradeoffs,
tradeoffs, and
and choosing
choosing what
what
not
not to
to do
do
•• Activities
Activities that
that fit
fit together
together and
and
reinforce
reinforce each
each other
other
•• Continuity
Continuity ofof strategy
strategy with
with
continual
continual improvement
improvement in in realizing
realizing
the
the strategy
strategy

Strategic Positioning
Whole Foods Markets
Distinctive
Distinctive
Value
Value Proposition
Proposition Activities
Activities
• Natural, fresh, organic, and prepared foods and • Well-lit, inviting supermarket store formats with
health items with excellent service at premium appealing displays and extensive prepared foods
prices sections
• Produce section as “theater”
• Educated, middle class, and affluent customers • Café-style seating areas with wireless internet for
passionate about food as a part of a healthy meetings and meals
lifestyle • 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
• Excellent strategies often include a social dimension of the value proposition

Defining the Value Proposition
What
What Which
Which
Customers?
Customers? Needs?
Needs?
• What end users? • Which products?

• What channels? • Which features?
• Which services?
What
What Relative
Relative
Price?
Price?
• A novel value proposition can also grow the pie/expand the industry

Strategic Positioning
Enterprise Rent-A-Car
Distinctive
Distinctive
Value
Value Proposition
Proposition Activities
Activities
• Home-city replacement cars for drivers • Numerous, small, inexpensive offices in each
whose cars are being repaired or who need metropolitan area, including on-premises offices at
major accounts
an extra vehicle, at low rates (30% below
airport rates) • Open during daylight hours
• Deliver cars to customers’ homes or rental sites,
or deliver 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
• Cultivate strong relationships with auto
dealerships, body shops, and insurance adjusters
• Grassroots marketing with limited television
• Hire extroverted college graduates to encourage
community interaction and customer service
• Employ a highly sophisticated computer network
to track the fleet

Making Strategic Tradeoffs
• Tradeoffs occur when strategic positions are incompatible

– the need for a 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 Tradeoffs
Neutrogena 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

Recent Thinking on the Sources of Competitive Advantage
•• “Key”
“Key”Success
SuccessFactors
Factors
•• “Core”
“Core”Competencies
Competencies
•• “Critical”
“Critical”Resources
Resources
• Competitive advantage is seen as concentrated in a few parts of the

value chain

Mutually Reinforcing Activities
Word-of- Zara Apparel Cutting-
mouth edge fashion
marketing at moderate
and repeat price and
buying Widely quality
popular
styles
Customers
chic but
Very cost-
Global
Little media frequent team of
conscious
advertising product trend-
changes spotters
Advanced
Production production
Extensive in Europe machinery
use of
store sales
data
Tight
Prime store
coordination Very
locations in JIT delivery with 20
high traffic flexible
wholly-owned
areas production
factories
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
Strategic Continuity
• Continuity of strategy is fundamental to sustainable competitive advantage

– e.g., allows the organization to understand the strategy
– builds truly unique skills and assets related to the strategy
– establishes a clear identity with customers, channels, and other outside entities
– strengthens the fit across the value chain
• Reinvention and frequent shifts in direction are costly and confuse the
customer, the industry, and the organization
• Continuity is required in the value proposition
• 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

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
• Customers ask for incompatible features or request new products or

services that do not fit the strategy
• Labor agreements limit ways of configuring activities
• Regulation constrains price, product, service or process alternatives

Internal Practices
• Inappropriate goals and performance metrics bias strategy choices
– Short time horizon
• A desire for consensus undermines strategic tradeoffs
• Rapid turnover of leadership undermines strategic direction to

achieve short-term performance benefits
• Inappropriate cost allocation leads to too many products, services,

or customers
• Outsourcing makes activities homogenous and less distinctive

Neutrogena 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.

Capital Market Biases
• Strong pressures to emulate currently “successful” peers
• Strong pressure to grow faster than the industry
• A strong bias for “doing deals” (M&A)
• Industry-wide analyst metrics are misaligned with true value and

drive strategic convergence that undermines performance
• Over-weighting of equity-based management compensation

amplifies these unhealthy pressures

Strategy
What Is a Strategy? What is Not a Strategy?
•• A
A unique
unique value
value proposition
proposition •• Best
Best practice
practice improvement
improvement
versus
versus competitors
competitors •• Execution
Execution
•• Aspirations
Aspirations
•• A
A different,
different, tailored
tailored value
value chain
chain •• A
A vision
vision
•• Learning
Learning
•• Clear
Clear tradeoffs,
tradeoffs, and
and choosing
choosing •• Agility
Agility
what
what not
not to
to do
do •• Flexibility
Flexibility
•• Innovation
Innovation
•• Activities
Activities that
that fit
fit together
together and
and •• The
The Internet
Internet (or
(or any
any technology)
technology)
reinforce
reinforce each
each other
other •• Downsizing
Downsizing
•• Restructuring
Restructuring
•• Continuity
Continuity ofof strategy
strategy with
with •• Mergers
Mergers // Consolidation
Consolidation
continual
continual improvement
improvement in in realizing
realizing •• Alliances
Alliances // Partnering
Partnering
the
the strategy
strategy
•• Outsourcing
Outsourcing

Defining the Right Business: Products and Services
Foodservice Distribution
Broadline Distribution Systems Distribution
• Customers are independent restaurants • Customers are national chains

and institutions
• The product line consists of well over • The product line consists of several
10,000 SKUs hundred SKUs
• Sales and service activities are carried • Customer relationships and services
out by local sales reps are specified by national contracts
• Value-added services, credit terms, and • Price is the key basis for selection;
distributors’ private-label products are customers do not purchase value-
valued and allow support product/service added services or private-label
differentiation products
• Logistical activities are heavily local in • A national distribution and

nature (local warehouses and trucks) warehousing network is required

Defining the Right Business: Geography
Cross
Cross--
Local
Local Regional
Regional National
National Global
Global
National
National
• Separate local • Integrated global

value chains Ability to Leverage Key Activities Across Geography
value chain
Firm Infrastructure

Activities
Value
Procurement a
g buyers are
Inbound Operations Outbound Marketing After-Sales willing to
i
Logistics Logistics & Sales Service pay
n
(e.g. Incoming (e.g. Assembly, (e.g. Order (e.g. Sales (e.g. Installation,
Material Component Processing, Force, Customer
Storage, Data Fabrication, Warehousing, Promotion, Support,
Collection, Branch Report Advertising, Complaint
Service, Operations) Preparation) Proposal Resolution,
Customer Writing, Web Repair)
Access) site)
Primary Activities
• A distinct strategy is needed for each relevant geographic market

Finding a Strategic Position
Segmenting the Industry Strategically Harnessing Tradeoffs

• Creatively segmenting product • Identifying tradeoffs in the value
varieties, customer groups, and proposition or in the value chain
purchase occasions
Leveraging Unique Activities Capitalizing on Industry Dynamics

• Building off activities with true • Identifying strategic positions opened
uniqueness up by industry changes
• Looking for new activity
configurations and combinations
• Migrate toward the chosen strategic position

• Focus incremental investments on reinforcing the chosen position

Segmentation and Strategic Positioning
Automobile Insurance
Progressive
Progressive Geico
Geico
Customer Group Customer Group
• High-risk drivers shunned by standard • “Preferred”, lowest risk drivers
automobile insurers
Set of Activities Set of Activities

• Distribution primarily through independent • Direct customer interaction through direct mail,
agents telephone, and the Internet
• Sales force that educates independent agents in • Sophisticated direct mail targeting low risk
complex information gathering techniques households
• 30-year database on high-risk drivers • 35+ year database and modeling utilities on
preferred drivers
• Complex rating scheme
• Complex rating and pricing system
• 14,000 different prices
• Heavy advertising to drive requests for rate
• 50-300% premium pricing over standard
quotes (“I’ve got good news.”)
segment
• Quote rates to only 50% of customers who
• Adjusters work from offices on wheels to provide
inquire about coverage
immediate response. Adjusters trained and
empowered to write out check at scene of • 15-20% lower prices than competition
accident • Network of insurance adjusters with cell phones
• Steep incentives to make a 4% underwriting working out of own vehicles for immediate
profit response
• Conservative, liquid investment portfolio • 24-hour customer service to handle sales, policy
inquires, and claims
• Conservative, liquid investment portfolio
Growing Strategically
1. 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 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, shareholders are best served by earning a high
return and returning capital, especially via dividends
Competing Internationally
Leveraging the Value Chain Across Geography
Firm Infrastructure

Activities
Procurement a
(e.g. Components, Machinery, Advertising, Services) r
g
Inbound Operations Outbound Marketing After-Sales Service i
Logistics Logistics & Sales
n
(e.g. Incoming (e.g. Installation,
Material Storage, (e.g. Assembly, (e.g. Order (e.g. Sales Force, Customer Support,
Data Collection, Component Processing, Promotion, Complaint
Service, Fabrication, Warehousing, Advertising, Resolution, Repair)
Customer Branch Report Preparation) Trade Shows,
Access) Operations) Proposal Writing)
Primary Activities
• How can activities be shared across geography to gain competitive

advantage?
• Where should each activity be located to gain competitive
advantage?

The Role of Leaders in Strategy
• Lead the process of choosing the company’s unique position

– The CEO is the chief strategist
– The choice of strategy cannot be entirely democratic
• 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 company’s strategy
• Measure progress against the strategy using 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
• Commitment to strategy is tested every day

Corporate Social Responsibility
A Growing Agenda
• External pressures for CSR continue to grow

– There are a widening range of issues for which companies are being held
responsible
– Community expectations continue to rise
– There are new government regulations and reporting requirements
– Activists are more sophisticated at using the media to advance their agendas
• Numerous organizations monitor, rank, and report social performance

– These rankings can have a meaningful impact on customers, investors
and potential partners
• The legal and business costs are great for those engaging in practices
deemed unacceptable
• CSR is increasingly important to business leaders, yet the concept and its
justifications remain unclear

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 understand
corporate strategy and operations
• Encourages short term 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 are based on broad aspirations that provide little
specific guidance or priorities for company actions
The Intersection of Business and Society
Economic Social
Objectives Objectives
• There is an inevitable link between a business and society

• The competitiveness of companies depends heavily on such things as
− Improving skill levels
− Safe working conditions
− A sense of equal opportunity
− Low levels of pollution (pollution is a sign of unproductive use of physical resources)
− A transparent, corruption-free business environment
− Trusted rule of law
• The health of a society depends on such things as

− Companies that can create wealth
− Productive workers
− Sustainable and efficient use of natural resources
− Low levels of pollution and environmental degradation
− Participation in the economy open to all citizens
• There is no inherent conflict between economic and social objectives, but a long-term
synergy
Inside-Out Links with Society
The Value Chain
• Education, job training
• Relationships with • Financial reporting practices
• Working conditions
universities • Governance practices
• Diversity in hiring
• Ethical research practices
(e.g. animal testing, GMOs) • Employee health care
Firm Infrastructure
• Product safety
Support (e.g. Recruiting, Training, Compensation System) • Product recycling
Activities Technology Development and disposal
(e.g. Product Design, Testing, Process Design, Material Research, Market Research)
M
Value
• Procurement practices Procurement a
(e.g. child labor, illegal g buyers are
willing to
diamonds, pricing to Inbound Operations Outbound Marketing After-Sales i
pay
Logistics Logistics & Sales Service n
farmers) (e.g. Incoming
Material (e.g. Assembly,
• Use of particular inputs Storage, Data Component
(e.g. Order
Processing,
(e.g. Sales Force,
Promotion,
(e.g. Installation,
Customer • Disposal of obsolete
Collection, Fabrication, Support,
(e.g. fur) Service,
Customer
Branch
Operations)
Warehousing,
Report
Advertising,
Proposal Complaint products
Preparation) Writing, Web Resolution,
• Utilization of natural
Access) site) Repair) • Handling of consumables
resources (e.g. motor oil, printing ink)
Primary Activities
• Process pollution,
energy use • Marketing practices
• Transportation impacts • Recycling (e.g. to children)
(e.g. congestion, logging • Hazardous materials • Pricing practices
roads) (e.g. pricing to the poor)
• Packaging disposal
(e.g. McDonalds Clamshell) • Use of consumer information
• Energy usage/pollution • Privacy
• Every activity in the value chain impinges on social factors in the locations where the
company operates. These impacts can be positive
43
or negative.
20061002 University of Iceland 20060925.ppt Copyright 2006 © Professor Michael E. Porter
Outside-In Social Impact
z Presence of high quality, specialized inputs z Access to capital
available to firms (open markets, government regulation)
– Human resources z Vigorous local competition
(e.g., Marriott’s job training) (absence of trade barriers, fair regulations)
– Physical infrastructure z Intellectual property protection
(e.g., Nestlé's milk collection dairies) z Transparency
– Administrative infrastructure
(financial reporting, corruption--e.g., Extractive
– Information infrastructure
Industries Transparency Initiative)
(e.g., Nestlé's knowledge transfer to milk
z Rule of law
farmers)
– Scientific and technological infrastructure (Security, protection of property, legal system)
(e.g., Intel’s investment in global wireless Context for z Meritocratic incentive system
(Opportunities for educational advancement)
access) Firm Strategy
– Natural resources
(e.g., Grupo Nuevo’s water conservation)
and Rivalry
Factor
Demand
(Input)
Conditions
Conditions
z Sophistication of local demand

Related and (Appeal of social value propositions, e.g.,
Whole Foods customers)
Supporting z Demanding regulatory standards
z Local suppliers Industries (e.g., California auto emissions & mileage
(e.g., Sysco’s locally grown produce) standards)
z Research institutions and universities z Unusual local demand in specialized
(e.g., Microsoft’s Working Connections) segments that can be served nationally
z Access to firms in related fields and globally
z Presence of clusters instead of isolated (e.g., Urbi housing financing; Unilever’s
industries ‘bottom of the pyramid’ strategy)
• Many of these elements are influenced by or inextricably linked with social conditions
Source: Michael Porter, The Competitive Advantage of Nations, 1990
Defining the Corporate Social Agenda
Generic Value Chain Competitive

Social Issues Impacts Context
– Social issues – Social issues that – Social issues in the

that are not are significantly company’s external
significantly impacted by the environment that
impacted by company’s affect the
the company’s activities in the underlying drivers
operations, ordinary course of of competitiveness
nor materially business in the locations
affect its where the company
long term operates
competitiveness
• Which issues fall into each category will differ by industry, cluster, company
and location
Corporate Involvement in Society: A Strategic Approach
Generic Value Chain Competitive

Social Issues Impacts Context
• Good citizenship • Mitigate harm • Strategic philanthropy

that leverages
activities and
capabilities to improve
salient areas of
context
• Unique value chain
activities that benefit
society while
reinforcing strategy
Defensive/Reactive Affirmative

Now What Is Strategy

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What is Strategy?

Professor Michael E. Porter

Copyright 2006 © Professor Michael E. Porter

20061002 University of Iceland 20060925.ppt 3 Copyright 2006 © Professor Michael E. Porter

20061002 University of Iceland 20060925.ppt 4 Copyright 2006 © Professor Michael E. Porter

Goodyear Tire and Rubber

Marriott International, Inc.

20061002 University of Iceland 20060925.ppt 5 Copyright 2006 © Professor Michael E. Porter

• The fundamental goal of a company is superior long-term return

• Prevalent accounting adjustments to reported profitability

• Goodwill must be treated as part of investment

• Setting unrealistic profitability or growth targets can undermine

Economic Performance Measures Shareholder-Derived Measures

• Shareholder value is the result of creating real economic value

• The fundamental unit of strategic analysis is the industry

• Company economic performance results from two distinct causes:

- Overall Rules of Competition - Sources of Competitive Advantage

• Strategy must encompass both

20061002 University of Iceland 20060925.ppt 10 Copyright 2006 © Professor Michael E. Porter

Bargaining Power Rivalry Among Bargaining Power

20061002 University of Iceland 20060925.ppt 12 Copyright 2006 © Professor Michael E. Porter

• Offering value-added services

• Offering private-label products

• Moving to national procurement contracts

• Increasing the use of sophisticated information technology

20061002 University of Iceland 20060925.ppt 13 Copyright 2006 © Professor Michael E. Porter

20061002 University of Iceland 20060925.ppt 14 Copyright 2006 © Professor Michael E. Porter

Operating Profit per

Human Resource Management

• Competing in a business involves performing a set of discrete

Human Resource Management

20061002 University of Iceland 20060925.ppt 17 Copyright 2006 © Professor Michael E. Porter

• Assimilating, attaining, and • Creating a unique and

Run the same races faster Choose to run a different race

20061002 University of Iceland 20060925.ppt 18 Copyright 2006 © Professor Michael E. Porter

20061002 University of Iceland 20060925.ppt 19 Copyright 2006 © Professor Michael E. Porter

• Excellent strategies often include a social dimension of the value proposition

• What end users? • Which products?

20061002 University of Iceland 20060925.ppt 21 Copyright 2006 © Professor Michael E. Porter

20061002 University of Iceland 20060925.ppt 22 Copyright 2006 © Professor Michael E. Porter

• Tradeoffs occur when strategic positions are incompatible

• Tradeoffs make a strategy sustainable against imitation by established

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

20061002 University of Iceland 20060925.ppt 23 Copyright 2006 © Professor Michael E. Porter

• Forgo cleaning, skin softening, and deodorizing

• Choose higher costs through the configuration of:

• Give up the ability to reach customers via:

20061002 University of Iceland 20060925.ppt 24 Copyright 2006 © Professor Michael E. Porter

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

20061002 University of Iceland 20060925.ppt 25 Copyright 2006 © Professor Michael E. Porter

• Fit is leveraging what is different to be more different

• Continuity of strategy is fundamental to sustainable competitive advantage

• Continuity is required in the value proposition

• Successful companies continuously improve in how they realize their strategy

20061002 University of Iceland 20060925.ppt 27 Copyright 2006 © Professor Michael E. Porter

Flawed Management Concepts

• Misunderstanding of strategy itself

• Poor industry definition

• Customers ask for incompatible features or request new products or

• Labor agreements limit ways of configuring activities

• Regulation constrains price, product, service or process alternatives

20061002 University of Iceland 20060925.ppt 28 Copyright 2006 © Professor Michael E. Porter