Keynote on Strategy at the India’s National Competitiveness Forum 2017 by Michael Porter, Professor, Harvard Business School
The essence of strategy lies in finding out a unique position that is exclusive to one’s business and involves long-term choices to distinguish ourselves from our competitors.
Since industries are different in terms of the nature of the competition, it is as important to understand our industry as it is to understand our firm.
The world today is starting to understand how business can play a much more powerful role in shaping the society around us, a role which has been traditionally left to only governments and NGOs to perform.
The most fundamental concept for any business aspiring to serve the society and being competitive is that of strategy. One of the biggest mistakes that companies often make is to think about a strategy where there is only a single way to compete. So, according to them being successful translates into becoming the best amongst the whole lot. Although this is the most natural human way to approach success, the same is not the case in business competition. In business, to be successful in a true sense what is needed is a strategy and it is not about just being the best.
The first and the foremost principle of strategy is to think about how unique your company can get. More specifically, how can it be possible for your company to create a unique value for the set of customers chosen to be served? Usually, companies get tempted to try and serve everybody. However, a fact that remains is that it is virtually impossible for any company to satisfy the needs of every customer. Strategy, then, is fundamentally about making choices. If you have a set of choices then that can help you decide which needs of which customers you can seek to meet.
The essence of strategy lies in finding out a unique position that is exclusive to one’s business and involves long-term choices to distinguish ourselves from our competitors. It must be seen as different from the goals that a company sets to achieve profits. Therefore, to grow faster and make exceptional profits is not a strategy. This alone invariably is a goal of every company that decides to come into the business. So, a strategy is a unique position that allows businesses to meet their goals. It can go on to include marketing, production, finance, R&D, operations and all other functions together to create the required “unique positioning”. Once a company gets grounded in a clear idea of what is a strategy then it can start with doing the analysis and make the necessary choices to get there.
Strategy is fundamentally about choosing who exactly is the company trying to please and then engineering a value chain to deliver on that.
Companies that are publicly listed generally get muddled by movements in their stock prices. Although they are an important indicator of a firm’s position in the marketplace, the end goal must be to create a superior economic performance. Higher stock prices are only the results and not a goal in itself. They go up and down on a regular basis depending on market fluctuations and can be taken as a long-term scorecard for any company. However, in the short run, the strategy must be to work towards sustained economic performance eventually letting the stock prices of the company to go up.
Another key principle involved is that strategy occurs at multiple levels in any company. In most of the companies, there is a core-level strategy which is also known as a business strategy. It is related to how to compete in each of the distinct businesses in which a company operates. A second level of strategy apart from the core strategy is known as corporate strategy which is concerned with the overall strategy of a diversified and a multi-business company. The latter is concerned firstly with the understanding of what different businesses a company is in. This is because different strategies are needed for different businesses of a company. Hence, many companies get stuck in thinking at a broader level for all their businesses. The next step which is involved here is that companies must ask themselves if they have the right portfolio. Is each business attractive in itself? Are we the best owners for the business? Does every business reinforce each other? Is there any synergy? Is there logic for how all the businesses get to fit together and so on? It is not difficult to see that if there are no synergies between a company’s businesses then it is always better to sell off because of zero value added. Companies must be sure of the synergies, that they are real and meaningful and not just a few temporary benefits. For instance, Disney has many different businesses but all of them are united under a common positioning or what is referred to as a basic value proposition. The company is sharing various resources like characters and video properties thus leveraging across all of its businesses. Being in a very unstable industry where some years are full of good films while others of bad ones, Disney has been remarkably robust in its corporate strategy which has given the company a lot of resilience over time.
A core business strategy, on the other hand, relates to the key elements of a strategy that must do with the industry or the business itself. Since industries are different in terms of the nature of the competition, it is as important to understand our industry as it is to understand our firm. If a company is in an industry which is increasingly in trouble, then it is possible to boast of a great position but that position will not be valuable in a true sense. So, companies must also learn to worry about the industry they are into, to help it thrive and not just focus only on its own position.
In terms of industry analysis, there is ample evidence now that a certain set of competitive forces collectively drive the fundamental attractiveness of an industry i.e., the average profitability of an industry. For example, the heavy truck industry in North America is a very difficult industry. The competitive forces are challenging including the vicious competition on price among the truck manufacturers and high regulatory standards leading to rising costs. However, since customers can consolidate into larger companies having significant bargaining power, rising costs cannot be passed on them by way of higher prices. Truck manufacturers also make some of the parts in-house and source different components from several suppliers. If the suppliers they are buying from happen to form a clout because of their own relationship with the end customer, the position of both the truck company and the manufacturer tends to be squeezed. Further, trucks can always be seen competing with substitutes such as railroads. So, there is an additional force of threat of substitutes which must be kept in mind. As far as the threat to entry is concerned, it is easy to get the parts and assemble the truck, while getting the dealer network might give a hard time to most of the companies. Being a classic example of industry analysis, this is reflective of a basic structure that exists in many other parts of the world as well.
An ideology which is wrongly present among companies and businesses is that competition in every industry is zero-sum i.e., each company doing the same thing with beating each other up on price prospects.
Usually, most of the companies tend to take a superficial look at an industry but the real trick is to get sophisticated in performing the overall industry analysis. The need is to dig deeper and understand the barriers. Industrial gases are a perfect example here. This industry makes oxygen, hydrogen, argon and all other industrial gases that are increasingly used in production processes of all kinds of other industries. A first look at this industry is normally associated with apprehensions about whether it will succeed or not. This is because one, bargaining power of big manufacturing companies remains quite high and second, there is little or no control over the price of the feedstock with which such gases are made. So, the first instinct is to not play in this industry. However, many companies have in fact done very well in this industry and the primary reason is that a superficial look does not help any company to arrive at the true industry structure. One of the many interesting features of this industry is that the costs of transportation are very high. If a company has only one customer for instance in Mumbai, all the money that is made will go off in driving a truck full of gases for just one customer. Having a greater number of customers in the same location here will get the company to become super-efficient compared to a company which delivers only to one or two customers. The point to be made is that companies must look below the surface and take out solutions that have been hiding from others.
A fundamental truth in competition which has been prevailing for years now and continues to prevail is that the concepts themselves are not much complicated but applying them, in reality, is bountifully hard. This holds true for both the companies and the investors that are always trying to figure out whether a company is successful or will be successful. A quintessential question that comes running at this point is that how can we achieve superior profitability in an industry, given its overall attractiveness? The answer depends on two competitive advantages: first is to differentiate oneself. This relates to doing something better and unique than others which can prompt a customer to pay more. The second advantage is a lower cost which arises not just by luck but because of the way processes get redesigned. Note that every company must decide on a path to walk on and so depending upon the circumstances if a company opts for differentiation leading to better quality and service then it might just become difficult for it to cut on costs. Then, ultimately every company needs to figure out what path it wants to be on and then have it turn into a strategy using what is referred to as the value chain.
A value chain is nothing but a way of mapping what operation in any business will look like. It includes manufacturing, marketing, sales, service, supply chain, technology development, etc. and a whole set of other things that are necessary to conduct that business. Taking the case of mobile communication business, it is all about what kind of network is the company going to operate? What will be the pricing approach? How is the company going to distinguish itself from potential competitors? What tools are to be used for marketing? Can the business go to several of the physical locations or should rather confine itself to just advertising? A strategy where there is clarity on the choices that a company is making to perform differently using a value chain is what can get the company a competitive advantage.
The first key idea in understanding what it requires in going from a value chain to a strategy is the notion of operational effectiveness versus the strategic positioning. Every industry consists of some of the best practices that it can give rise to and one of the many jobs of all the companies is to implement those in their respective businesses. When companies find other players in the market serving their customers better, they naturally try to make sure to reach at least some threshold level of the best practices. This idea of doing the same things as your competitor but in a much better way is what is termed as operational effectiveness. However, this is not to be confused with strategy. Strategy essentially involves building on those best practices and then including the choices that are going to define the uniqueness of any business. Thus, just being operationally effective is not going to get any company to superior performances since all the competitors will be implementing the same best practices. Action taken on both these fronts is important if a business is to succeed in competitive markets.
Representing a great strategy example, Scandinavian chain Ikea’s strategy starts with a unique value. The company came out with a segmentation of customers in a rather innovative way. Before its entry in the furniture space, nobody ever thought about customers with relatively small living spaces. An idea that came to be as a breakthrough was that the company did not go for fully assembled furniture. The model is to assemble parts and sell those parts in a box to their customers. This strategy of saving huge amounts of logistical costs and then passing the benefits on to the customers in the form of lower prices worked well for the company to cater to an altogether different segment of the furniture consumer base that is price sensitive. Also, the idea of the customer having to arrange the parts as per their own convenience helped the company discover a newer segment to serve. Of course, many people did not like the concept but it did work for many others in terms of low prices, quality, service, etc. Hence, one of the most basic things in strategy is to understand that no business can please or serve every customer that it wishes. A strategy is fundamentally about choosing who exactly is the company trying to please and then engineering a value chain to deliver on that. Then, on similar lines, it is to say that strategy is what a company chooses “not” to do. Clarity on choosing what all to do is a good sign that a company can be clear about its overall strategy.
Talking about a successful strategy also must do with connecting the dots across the value chain that a company chooses. It is important to ensure that the service connects with the way company markets its products, connects with the different nature of the products, etc. Moreover, the pieces need to fit together across the value chain so that there is continuity. Then changing strategy from time to time does not make sense here. It can take around a good 2-3 years to implement a strategy since a company must get all the pieces aligned around its ultimate position so that continuity assumes crucial importance.
An ideology which is wrongly present among companies and businesses is that competition in every industry is zero-sum i.e., each company doing the same thing with beating each other up on price prospects. Therefore, to create an environment where competition is not zero-sum but rather a positive-sum is what involves a different strategy by every company in every industry. This is the type of competition where the whole industry can be even more attractive thus leading to competitors doing well for themselves.
Since strategy must be done collectively by a multi-functional team, a move to let each functional department do their own strategy might never work in the real world, let alone an imaginary one. This includes the production strategy, the marketing strategy, the service strategy and all those other strategies that are required to pull off a successful business. So, it is primarily the job of the chief strategist or the CEO of the company to have an overall holistic perspective of the business and put every department’s role in the context of the positioning that the company is wanting to achieve. As a leader, one of the most critical jobs is to create the right processes to allow the team to succeed in an environment where dynamism remains dominant. In the end, it is about celebrating your company’s strategy and the unique position that each member of the company helps create in the market.