Presentacion Michael Porter Auditorio IB

Strategic Thinking: Implications for Peruvian
Companies
Professor Michael E. Porter

Harvard Business School
Lima, Peru
November 30, 2009

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 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 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: Nov. 25, 2009
20091130 – Peru (Strategy).ppt 1 Copyright 2009 © Professor Michael E. Porter

Thinking Strategically
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

Understanding the Concept of Strategy
• Strategy is more than a particular set of actions
– “Our strategy is to merge…”
– “… internationalize…”
– “… consolidate the industry…”
– “… outsource…”
– “…double our R&D budget…”
• Strategy is different than aspirations

– “Our strategy is to be #1 or #2…”
– “Our strategy is to grow…”
– “Our strategy is to be the world leader…”
– “Our strategy is to provide superior returns to our shareholders…”
• Strategy is not the same as vision

– “Our strategy is to best understand and satisfy our customers’ needs…”
– “… provide superior products and services…”
– “…to advance technology for mankind…”
• Strategy defines the company’s distinctive approach to competing and the

competitive advantages on which it will be based
Setting the Right 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

Shareholder Value Is Not The Goal
Superior
Superior Economic
Economic Shareholder
Shareholder Value
Value
Performance
Performance
• Sustained ROIC and • Stock Price

Growth
• Shareholder value is the result of creating real economic value

• Pleasing today’s shareholders is not the goal

Multiple Levels of Strategy Should
Drive Competitive Advantage
Competitive
Competitive or
or
Business
Business Strategy
Strategy
• How to compete in each distinct business or

industry
Corporate
Corporate or
or Portfolio
Portfolio Strategy
Strategy
• The company’s overall mix of businesses and

the integration of business unit strategies

Economic Foundations of Competition
• The basic unit of strategic analysis is the industry

– Defining the relevant businesses and business units (product scope /
geographic scope) is essential to good strategy
• Economic performance results from two distinct causes
Relative
Relative Position
Position
Industry
Industry Within
Within the
the
Structure
Structure Industry
Industry
- Overall Rules of Competition - Sources of Competitive Advantage
• Strategic thinking must encompass both

Disaggregating Economic Performance:
Industry vs. Position
35%
31.6%
30%
27.8%
Return on 25% ROIC = Earnings before
Invested interest and taxes
Capital divided by invested
1993-2007 20% capital less excess cash
15%
13.6%
10.5%
10%
5%
0%
Revlon Paccar
Industry Average
Note: Excess cash is calculated by subtracting cash in excess of 10% of annual revenue.
Source: Compustat (2008), author’s analysis
Fundamentals of Industry Structure
Threat of Substitute
Products or Services
Bargaining Power Rivalry Among Bargaining Power

of Suppliers Existing of Buyers
Competitors
Threat of New
Entrants
• Part of the strategy agenda is to drive improvements in industry

structure
Reshaping Industry Competition
Zero
Zero Sum
Sum Positive
Positive Sum
Sum
Competition
Competition Competition
Competition
• Compete head to head • Compete on strategy

• One company’s gain • More than one
requires another company’s company can be
loss successful
• Competition undermines • Competition expands
industry profitability the value pool

Positioning and Industry Structure
Heavy Trucks
Threat
Threat of
of Substitute
Substitute
Products
Products or
or
Services
Services
• Railroads
• Water transportation
Bargaining Rivalry
Rivalry Among
Among Bargaining
Bargaining Power
Power
Bargaining Power
Power
of Existing
Existing of
of Buyers
Buyers
of Suppliers
Suppliers
Competitors
Competitors
• Large independent • Heavy price • Large fleets
suppliers of engines competition on • Leasing companies
and drive train standardized models • Small fleets and owner
components operators
• Unionized labor
Threat
Threat of
of New
New
Entrants
Entrants
• Many truck producers

are assemblers

Paccar Strategic Positioning
• Focus on owner-operators
• Design trucks with special features and amenities
• Customization and build-to-order
• Design for low truck operating costs
• Offer extensive roadside assistance to truckers
• Premium price
• Different customers / different basis of competing

Strategic Positioning
Economic Fundamentals
Differentiation
(Higher Price)
Competitive
Competitive
Advantage
Advantage
Lower Cost

Foundations of Competitive Advantage
Configuring the Value Chain
• Competing in any business involves performing a set of discrete
activities, in which competitive advantage resides
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
• Strategy is reflected in how activities in the value chain are

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

extending best practices competitive position
Do the same thing better Do things differently to meet

different needs

Five Tests of an Excellent Strategy
• A unique value proposition
• A different, tailored value chain
• Clear
Clear tradeoffs,
tradeoffs, and choosing
what not to do
• Activities in the value chain that

fit together and reinforce
each other
• Strategic continuity with

continual improvement in
realizing the strategy

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?
• Premium? Discount?
• Unique value propositions often expand the market

IKEA, Sweden
Distinctive
Distinctive
Value
Value Proposition
Proposition Activities
Activities
• Young, sophisticated or space constrained • Modular, ready-to-assemble, easy to package

buyers who value style and materials but are designs
price sensitive • In-house design of all products
• Stylish, space efficient and scalable furniture • Wide range of styles displayed in huge
and accessories at very low price points warehouse stores with large on-site inventories
• Self-selection
• Self-assembly by the customer
• Extensive customer information in the form of
catalogs, 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

Nespresso
Distinctive
Distinctive
Value
Value Proposition
Proposition Activities
Activities
• Uniquely high quality, easy to prepare • Extra-high quality ground coffee in 16+
espresso coffee at a premium price varieties
• Demanding, convenience- sensitive, • Individually proportioned capsules for
affluent consumers, and offices freshness and ease of use
• Tailored espresso machines
manufactured by high-end machine
vendors
• Capsules sold only online or through
about 200 coffee boutique shops in
major cities, not in mass market
channels
• Nespresso Club to achieve high levels of
communication with customers
• Focused image-oriented media
advertising

Five Tests of an Excellent Strategy
• A unique value proposition
• A different, tailored value chain
• Clear tradeoffs, and choosing what

not to do
• Activities in the value chain that fit

together and reinforce each
other
• Strategic continuity with continual

improvement in realization

Making Clear Strategic Tradeoffs
• Tradeoffs exist where strategic positions are incompatible
Strategic Tradeoffs
– Incompatible product or service features or attributes
– Differences in the value chain deliver a chosen value proposition
– Inconsistencies in image or reputation between strategic positions
– Limits in organizational capacity to implement multiple ways of
competing simultaneously
• Tradeoffs make a strategy hard for competitors to imitate

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

Strategic Tradeoffs
IKEA, Sweden
IKEA
IKEA Typical
Typical Furniture
Furniture Retailer
Retailer
Product Product
• Low-priced, modular, ready-to-assemble • Higher priced, fully assembled products
designs
• No custom options • Customization of fabrics, colors, finishes,
and sizes
• Furniture design driven by cost, • Design driven by image, materials, varieties
manufacturing simplicity, and style
Value Chain Value Chain

• Centralized, in-house design of all products • Source some or all lines from outside
suppliers
• All styles on display in huge warehouse stores • Medium sized showrooms with limited
portion of available models on display
• Large on-site inventories • Limited inventories / order with lead time
• Limited sales help, but extensive customer • Extensive sales assistance
information
• Long hours of operation • Traditional retail hours

Typical Thinking on the Sources of Competitive Advantage
• Competitive advantage is seen as concentrated in a few parts of the

value chain
•• “Key”
“Key”Success
SuccessFactors
Factors
•• “Core”
“Core”Competencies
Competencies
•• “Critical”
“Critical”Resources
Resources
• Successful strategies create numerous advantages, not a few

Integrating the Value Chain
Zara Apparel
Word-
Word-of-
of- Cutting-
Cutting-
mouth Customers edge fashion
marketing chic but at moderate
and repeat cost-
cost- price and
buying conscious quality
Wide
range of Global
styles team of
trend-
spotters
Very
Majority of Advanced
Little media frequent
production production
advertising product machinery
in Europe
changes
Extensive
use of
Prime store store sales
locations in data
high traffic Very
areas Tight
flexible
coordination
JIT delivery with 20 production
wholly-owned system
factories
• Strategic fit comes from 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 a precondition for sustainable competitive

advantage
– e.g., Understanding the strategy
– Building truly unique skills and assets
– Establishing a clear identity
– Strengthening fit across the value system
• Reinvention and frequent shifts in direction are costly and confuse the
customer, the industry, and the organization
• Strategic continuity requires an enduring value proposition while

continuously improving ways to realize it
– Strategic continuity and continuous change should occur simultaneously
– Continuity of strategy allows learning and change to be faster and more
effective
Growing Strategically
1. Make the strategy even more distinctive

2. Deepen the strategic position with target customers (rather than
broaden it)
3. Expand geographically to tap new regions or countries using
the same positioning
4. Expand the market for what the company can uniquely deliver
• It is an illusion that growth in new, unserved segments is

profitable
• It is dangerous to attempt to grow faster than the underlying
market for an extended period.
• Industry leaders should concentrate as much, or more, on
growing the industry as on growing market share

Strategic Thinking at Peruvian Companies
• Low Price • Superior Value
• Share of Market • Unique Position
• Product / Product • Customer Experience

Features • Total Customer Support
• Export Uniform Products • Locally-Tailored Regional

and Global Strategy

Multiple Levels of Strategy Should
Drive Competitive Advantage
Competitive
Competitive or
or
Business
Business Strategy
Strategy
• How to compete in each distinct business or

industry
Corporate
Corporate or
or Portfolio
Portfolio Strategy
Strategy
• The company’s overall mix of businesses and

the integration of business unit strategies

Premises of Corporate Diversification
• Overall corporate size per se is irrelevant for economic value
• Competition occurs at the business level
• Being part of a diversified company involves inevitable costs for

business units
• Corporate strategy must produce a clear and offsetting benefit to

the competitive advantage of business units which exceeds
alternative governance structures (e.g. alliances)
• Shareholders can diversify directly at lower cost
• The central issue in corporate strategy is how the corporation

adds competitive value to its businesses

Diversification in Emerging Economies
Emerging Country Diversified Companies in

Business Groups Advanced Economies
Walt Disney
Hollywood
Pictures
Time
Sharing Miramax
Real
Estate Mickey’s Touchstone
Develop- Kitchen*
Computer
Computer ment Resort Motion
Wholesaler
Wholesaler Hotels Picture
Distribution
Cruise
Fast
FastFood Real
Food RealEstate
Estate Line
Family
Franchises
Franchises Services
Services Theme Motion
Parks Pictures
Financial
Financial Airline
Airline Tobacco
Tobacco
Services
Services Sports
Team Animated Traveling Multi-
Broadway Broadway
Feature Films Shows media
Imports/
Imports/ Food
Food
Productions
Productions
Theater
Distribution
Distribution Processing
Processing
Direct Consumer Television
Grocery
Grocery Marketing Products Program-
Hotel Textiles Disney ming
Hotel Stores Textiles Disney
Stores Records Channel
Industrial Retail Adult

Car
Car Industrial Stores Youth Cable
Dealership Parts
Parts Books and Channels
Dealership
Educational
Hollywood Materials
Records
Sugar
Sugar Television
Network
Hyperion
Books
Adult
Discover Publishing / Radio Televisi
Magazine Newspapers Stations on
Stations

Creating Corporate Value Added
M
a
r
g
i
n
M
a
r
g
i
n
• Successful companies capture interrelationships across the value

chains of business units
– Transferring proprietary knowledge and skills across units
– Sharing activities across business unit value chains
• Sharing corporate overhead is not enough
Obstacles to Strategic Thinking
• Misunderstanding strategy principles
• 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
• Inappropriate goals and performance metrics bias strategy

choices
• A desire for consensus blurs strategic tradeoffs
• Short term pressure to please shareholders

The Role of Leaders in Strategy
• Drive operational improvement, but establish a clear strategy
• Communicate the strategy relentlessly to all constituencies
• Measure progress against the strategy using tailored metrics tied

to the company’s position
• Maintain discipline around the strategy, in the face of many

distractions.
– Commitment to strategy is tested every day
• Tailor responses to market trend to the strategy
• Sell the strategy and how to evaluate progress against the

strategy to the financial markets

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

• Numerous outside parties are monitoring, ranking, and reporting
social performance
• The legal, business and reputation risks are great for companies
engaging in practices deemed unacceptable
YET
• Few companies have integrated society into strategy in a way that

reinforces competitive advantage for the business
AND
• Concern with social issues will be a defining characteristic of the

post-crisis era

Integrating Company and Community
Company Social
Competitiveness Development
• There is an inevitable link between business and society

• A healthy business depends on a healthy community to create
demand for its products and provide a supportive business
environment
• A healthy society depends on competitive companies that can
create jobs, support high wages, build wealth, buy local goods, and
pay taxes
• There is a long-term synergy between economic and social objectives

Competitiveness and Social Issues
Worker
Education and
Poverty in Skills
the Company’s Worker Safety
Communities
Environmental Company Gender Equity

Impact Productivity
Employee
Energy Use
Health
Water Use

The Concept of Shared Value
Shared Value: Policies and practices that enhance the

competitiveness of a company while simultaneously
advancing economic and social conditions in the
communities in which it operates
• Find and expand the points of convergence between economic and

social objectives
– These points of convergence are growing
• Achieve shared value through understanding new needs, new

technologies, and new approaches to management
• Shared value opportunities are even greater in developing countries
• Shared value thinking applies equally to NGOs and governments

Creating Shared Value
Nestlé
Nutrition
Water Rural
Development

Creating Shared Value
Nespresso
• Reconfigure the value chain

– Reconceiving coffee procurement
• Upgrade the coffee cluster in each sourcing region
• Take concerted action: partnering with stakeholders
Shared Value
Farmers Community Nespresso
• Better prices • Environmental • Better quality
• Better yields sustainability • Stable supply
• Better processing • Economic • Reinforces
development strategy

Strategy and Society
Other Case Studies
• Toyota Energy efficient vehicles
• General Electric Ecoimagination
• Swiss Re Enabling the market for investments in

renewable energy and climate change

The Moral Purpose of Business
• The most important thing a corporation can do for society is to

contribute to a prosperous economy
– Business has no need to be defensive about its role
• However, corporations depend on a healthy society to sustain
competitiveness
• Companies have the tools, capabilities, and resources to have a
major impact on social issues
• Each company should identify the particular set of societal
problems that it is best equipped to help resolve, and from which will
arise the greatest long term synergy with its business
• Addressing these issues using the principles of shared value will
lead to self-sustaining solutions
• Businesses are invaluable strategic partners for NGO’s,
government and other institutions to achieve society’s most cherished
aims

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
• Seize opportunities for discontinuities which are more likely to emerge
• Strategy is more important in downturns, not less

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Strategic Thinking: Implications for Peruvian

Professor Michael E. Porter

November 30, 2009

20091130 – Peru (Strategy).ppt 1 Copyright 2009 © Professor Michael E. Porter

• The worst error in strategy is to compete with rivals on the same

20091130 – Peru (Strategy).ppt 2 Copyright 2009 © Professor Michael E. Porter

• Strategy is different than aspirations

• Strategy is not the same as vision

• Strategy defines the company’s distinctive approach to competing and the

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

20091130 – Peru (Strategy).ppt 4 Copyright 2009 © Professor Michael E. Porter

• Sustained ROIC and • Stock Price

• Shareholder value is the result of creating real economic value

20091130 – Peru (Strategy).ppt 5 Copyright 2009 © Professor Michael E. Porter

• How to compete in each distinct business or

• The company’s overall mix of businesses and

20091130 – Peru (Strategy).ppt 6 Copyright 2009 © Professor Michael E. Porter

• The basic unit of strategic analysis is the industry

- Overall Rules of Competition - Sources of Competitive Advantage

• Strategic thinking must encompass both

20091130 – Peru (Strategy).ppt 7 Copyright 2009 © Professor Michael E. Porter

Bargaining Power Rivalry Among Bargaining Power

• Part of the strategy agenda is to drive improvements in industry

• Compete head to head • Compete on strategy

20091130 – Peru (Strategy).ppt 10 Copyright 2009 © Professor Michael E. Porter

• Many truck producers

20091130 – Peru (Strategy).ppt 11 Copyright 2009 © Professor Michael E. Porter

• Design trucks with special features and amenities

• Customization and build-to-order

• Design for low truck operating costs

• Offer extensive roadside assistance to truckers

• Different customers / different basis of competing

20091130 – Peru (Strategy).ppt 12 Copyright 2009 © Professor Michael E. Porter

20091130 – Peru (Strategy).ppt 13 Copyright 2009 © Professor Michael E. Porter

Human Resource Management

• Strategy is reflected in how activities in the value chain are

• Assimilating, attaining, and • Creating a unique

Do the same thing better Do things differently to meet

20091130 – Peru (Strategy).ppt 15 Copyright 2009 © Professor Michael E. Porter

• A unique value proposition

• A different, tailored value chain

• Activities in the value chain that

• Strategic continuity with

20091130 – Peru (Strategy).ppt 16 Copyright 2009 © Professor Michael E. Porter

• What end users? • Which products?

• Unique value propositions often expand the market

20091130 – Peru (Strategy).ppt 17 Copyright 2009 © Professor Michael E. Porter

• Young, sophisticated or space constrained • Modular, ready-to-assemble, easy to package

20091130 – Peru (Strategy).ppt 18 Copyright 2009 © Professor Michael E. Porter

20091130 – Peru (Strategy).ppt 19 Copyright 2009 © Professor Michael E. Porter

• A unique value proposition

• A different, tailored value chain

• Clear tradeoffs, and choosing what

• Activities in the value chain that fit

• Strategic continuity with continual

20091130 – Peru (Strategy).ppt 20 Copyright 2009 © Professor Michael E. Porter

• Tradeoffs exist where strategic positions are incompatible

• Tradeoffs make a strategy hard for competitors to imitate

20091130 – Peru (Strategy).ppt 21 Copyright 2009 © Professor Michael E. Porter

Value Chain Value Chain

20091130 – Peru (Strategy).ppt 22 Copyright 2009 © Professor Michael E. Porter

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

• Successful strategies create numerous advantages, not a few

20091130 – Peru (Strategy).ppt 23 Copyright 2009 © Professor Michael E. Porter