Creating Shared Value: Strategy in the Post-Crisis Era

Professor Michael E P t P f Mi h l E. Porter Harvard Business School Madrid ExpoManagement June 16, 2010
This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (Th F Ad t (The Free P Press, 198 ) “Wh i S 1985); “What is Strategy?” (H ?” (Harvard B i d Business R i Review, N /D 1996) “S Nov/Dec 1996); “Strategy and the I d h Internet” (H ” (Harvard B i d Business Review, March 2001) and On Competition (Harvard Business Review, 2008). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any 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: June 15, 2010
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Copyright 2010 © Professor Michael E. Porter

Thinking Strategically

COMPETING TO BE THE BEST

COMPETING TO BE UNIQUE

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

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Copyright 2010 © Professor Michael E. Porter

Setting the Right Financial Goals

• Strategic thinking starts with setting proper financial goals for the company

• The fundamental goal of a company is superior long-term return on investment • Growth is good only if superiority in ROIC is achieved and sustained
– ROIC threshold

• Setting unrealistic profitability or growth targets can undermine strategy gy

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Copyright 2010 © Professor Michael E. Porter

Economic Performance versus Shareholder Value Economic Performance Shareholder Value • Sustained ROIC • Sustainable Revenue Growth • Stock Price • EPS Multiple • EPS Growth • Shareholder value is the result of creating real economic value • Pleasing today’s shareholders is not the goal today s 20100616 – MadridExpomanagement. Porter .ppt 4 Copyright 2010 © Professor Michael E.

ppt 5 Copyright 2010 © Professor Michael E. Porter .Determinants of Superior Performance Differentiation (Higher Price) Competitive C titi Advantage Lower Cost 20100616 – MadridExpomanagement.

Report Preparation) Marketing & Sales (e. Components. Warehousing. Advertising.g. Customer Support.g. Training. Strategy is p g gy manifested in how activities in the value chain are configured and linked together 20100616 – MadridExpomanagement. Testing. Recruiting. Material Research. Planning. Component Fabrication. Branch Operations) Outbound Logistics (e. . Financing. Installation.g. Assembly. Complaint Resolution. Service. Collection. pp .g. Process Design. Web site) After Sales After-Sales Service (e.g. Promotion. Order Processing. Sales Force. Proposal Writing.Competitive Advantage and the Value Chain Firm Infrastructure (e.g. Market Research) M a r g Value What buyers are willing to pay Procurement (e. g. Product Design. Porter . Customer Access) Operations (e. Services) Inbound Logistics (e. Advertising.g.g. Compensation System) Technology Development (e. Machinery.ppt 6 Copyright 2010 © Professor Michael E. Investor Relations) Human Resource Management Support Activities (e.g. Repair) i n Primary Activities • All competitive advantage resides in the value chain. Data g . Incoming Material Storage.

Porter . and extending best practices • Creating a unique and sustainable competitive position Do the same thing better Do things differently to achieve a different purpose 20100616 – MadridExpomanagement. attaining.ppt 7 Copyright 2010 © Professor Michael E.Achieving Superior Performance Operational Effectiveness is Not Strategy Operational Effectiveness Strategic Positioning • Assimilating.

tailored value chain • Clear tradeoffs. Porter . and choosing what not to do • Activities in the value chain that fit g together and reinforce each other • Strategic continuity with continual improvement in realization 20100616 – MadridExpomanagement.ppt 8 Copyright 2010 © Professor Michael E.Five Tests of a Strategy • A unique value proposition compared t other organizations d to th i ti • A different.

do-it-yourself videos. ready-to-assemble. 20100616 – MadridExpomanagement. space efficient and scalable furniture and accessories at very low price points. first time. Porter . or price-sensitive buyers Stylish. and y assembly instructions Ikea designer names attached to related products to inform coordinated purchases Long hours of operation Suburban locations with large parking lots On-site. easy to package designs In-house design of all products Wide range of styles displayed in huge warehouse stores with large on site inventories on-site Self-selection Extensive customer information in the form of catalogs. Sweden Value Proposition • • • • • • • • • • • Distinctive Activities Modular. explanatory ticketing.ppt 9 Copyright 2010 © Professor Michael E. low-cost. restaurants Child care provided in the store Self-delivery by most customers • • Young.Strategic Positioning IKEA.

Porter .ppt 10 Copyright 2010 © Professor Michael E.Defining the Value Proposition What Wh t Customers? Which Needs? • • What end users? What channels? • • • What Relative Price? Which products? Which features? Which services? • Premium? Discount? • A novel value proposition often expands the market 20100616 – MadridExpomanagement.

cities not in mass market food channels Uses the Nespresso Club to achieve high levels of communication with customers Focused image-oriented media image oriented advertising 20100616 – MadridExpomanagement.Strategic Positioning Nespresso Value Proposition Distinctive Activities • Uniquely high quality. con enience sensiti e affluent consumers and offices • Extra-high quality ground coffee in 16+ • • • • • varieties Individually proportioned capsules for freshness and ease of use Tailored espresso machines manufactured to specifications by highend machine vendors Capsules sold only online or through about 200 coffee boutique shops in major cities. Demanding. Porter .ppt 11 Copyright 2010 © Professor Michael E. easy to prepare espresso coffee at a premium price • Demanding convenience-sensitive.

tailored value chain • Clear tradeoffs. Porter .Five Tests of a Strategy • A unique value proposition compared t other organizations d to th i ti • A different. and choosing what not to do • Activities in the value chain that fit g together and reinforce each other • Strategic continuity with continual improvement in realization 20100616 – MadridExpomanagement.ppt 12 Copyright 2010 © Professor Michael E.

modular.ppt 13 Copyright 2010 © Professor Michael E. fully assembled products • Customization of fabrics. g simplicity. and style Value Chain • Centralized. varieties Value Chain • Source some or all lines from outside suppliers • Medium sized showrooms with limited portion of available models on display • Limited inventories / order with lead time • Extensive sales assistance • Traditional retail hours 20100616 – MadridExpomanagement. ready-to-assemble designs • No custom options • Furniture design driven by cost. Porter . in-house design of all p . colors. g products • All styles on display in huge warehouse stores • Large on-site inventories g • Limited sales help. Sweden IKEA Product • Low-priced. and sizes • Design driven by image. finishes. manufacturing g y . but extensive customer information • Long hours of operation Typical Furniture Retailer Product • Higher priced.Strategic Tradeoffs IKEA. materials.

informative displays and labels More impulse buying Self delivery and assembly by most customers t Increased likelihood of follow-on purchase Limited Sales Staffing Selfselection by customer Ample inventory on site Ease of transport and t t d assembly Complete line of p furniture and accessories to furnish home Designer identification of compatible lines Year-round Year round stocking to even out production Modular.ppt 14 Copyright 2010 © Professor Michael E.Mutually Reinforcing Activities Ikea Suburban locations with ample parking Instructions and support for customer assembly High traffic store layout Explanatory catalogs. Porter . scalable furniture designs ‘Knock-down’ kit packaging In-house design focused on cost of manufacturing Low manufacturing cost 100 percent sourcing from long-term long term suppliers High variety. but ease of manufacturing • Fit is leveraging what is different to be more different 20100616 – MadridExpomanagement.

Th are not Strategic ti it d ti h h ld i lt l They t inconsistent • Continuity of strategy allows learning and change to be faster and more effective 20100616 – MadridExpomanagement. allows the organization to understand the strategy build truly unique skills and assets related to the strategy establish a clear identity with customers. and the organization • M i t i continuity i th value proposition Maintain ti it in the l iti • Continuously improve ways to realize the value proposition – St t i continuity and continuous change should occur simultaneously. and other outside entities strengthen fit across the value chain • “Reinvention” and frequent shifts in direction are costly and confuse the customer.Strategic Continuity • Continuity of strategy is fundamental to sustainable competitive advantage – – – – e.g.. channels.ppt 15 Copyright 2010 © Professor Michael E. Porter . the industry.

Porter .Growing Social Challenges • External pressures for corporate social responsibility continue to grow • Many companies are engaged in an unprecedented range of CSR activities • While the legitimacy of business continues to erode • Most companies treat CSR and community issues as separate from their core business agenda • Company practice in CSR leaves much room for improvement – Unfocused – Reactive – PR-driven – Limited impact – Hard to sustain • Yet concern with social issues will be a defining characteristic of the post-crisis era 20100616 – MadridExpomanagement.ppt 16 Copyright 2010 © Professor Michael E.

relocating.The Boundaries of Capitalism Company C Profitability and Growth Social d S i l and Economic Development • Narrow cost minimization • Ease of outsourcing. and globalizing • Shortening time horizons • Tradeoff mindset 20100616 – MadridExpomanagement. Porter .ppt 17 Copyright 2010 © Professor Michael E.

ppt 18 Copyright 2010 © Professor Michael E. Porter .Sources of Competitive Advantage: New Learning Employee Education and Skills Poverty in aC Company’s Community Worker Safety Environmental Impact Company Productivity P d ti it Gender Equity Energy Use Employee Health Water Use • Social deficits create economic cost • External conditions shape company productivity 20100616 – MadridExpomanagement.

Porter . i d i t l bj ti rather than assume tradeoffs or the need for redistribution – Driven by value creation thinking • Shared value arises from a deeper understanding of the drivers of competitiveness and competitive advantage – The opportunities are growing • Achieving shared value requires new operating practices. new technologies.ppt 19 Copyright 2010 © Professor Michael E.The Concept of Shared Value Shared Value: Corporate policies and practices that enhance the competitiveness of the company while simultaneously advancing economic and social conditions in the communities in which it operates • Fi d and expand th congruence b t Find d d the between economic and societal objectives. technologies and new approaches to competing 20100616 – MadridExpomanagement.

ppt .Shared Value vs. CSR CSR CSV • • • • • • • Values: doing good Philanthropy Selfless Discretionary Agenda externally determined Separate from profit maximization Limited (CSR) budget • • • • • • • Value: economic and social benefits relative to cost Joint value creation Mutual benefits for the company p y Integral to competing Company specific / internally generated Integral to profit maximization Total budget Example • Fair trade Example • Transforming procurement to increase quality and yield • In either case. Porter 20100616 – MadridExpomanagement. 20 Copyright 2010 © Professor Michael E. compliance with regulations and good corporate practice is assumed.

ppt 21 Copyright 2010 © Professor Michael E. Porter .Levels of Shared Value • Reconfigure the value chain using shared value to drive productivity • Create products that meet social needs • Build clusters and a supportive local external context to enhance pp productivity and create self-reinforcing economic development 20100616 – MadridExpomanagement.

Report Proposal Preparation) Writing. Customer Access) Operations (e.ppt 22 Copyright 2010 © Professor Michael E. Customer Support. and low environmental impact • Pricing models for lower income customers • Sustainable credit policies • Local processing • Limiting emissions and waste • Minimizing use of hazardous materials • Better energy and water use • Worker safety • Upskilling • The greatest opportunities for shared value are in activities most salient to a company’s particular business – Some opportunities will be generic to many companies. Sales Force. Services) Inbound g Logistics (e. Advertising. Machinery. Service.g. Product Design. Advertising. Planning.g. Processing. Components. Component Fabrication. Porter . Recruiting. Order (e. efficiency. p realization • Sourcing locally • Local and small vendor development • Purchasing transparency Firm Infrastructure (e.g.g.Reconstructing the Value Chain • Enhanced procurement to support vendor quality. Process Design. safety. Training.g. Assembly.g.g.g. Warehousing. and price y. Material Research. Investor Relations) Human Resource Management (e. Incoming Material Storage. Promotion. Data Collection. Installation. Testing. Branch Operations) Outbound g Logistics Marketing & Sales After-Sales Service (e. Complaint Resolution. Financing. Compensation System) Technology Development (e.g. Repair) i n • Recruiting from diverse and disadvantaged communities • Employee education and job training • Enhancing employee health • Modifying compensation and benefit practices for lower income workers • Enhancing retention • Process transformation (e. Web site) • Limiting logistical intensity g g y and impacts • Recycling and reuse of products • Remote services • Packaging use and disposal • Limiting logistical intensity • Local channel development • Marketing nutrition. Market Research) M a r g Procurement (e. and become new best practices company s • Some opportunities to create shared value will create competitive advantage and reinforce a company’s strategy 20100616 – MadridExpomanagement.

Porter .The Social Dimension of Products • Most products and services address not just economic but social needs. such as: – – – – – – Environmental impact Safety Health and nutrition Savings / sound financing Inclusion Education • There is new awareness of underserved needs in disadvantaged and developing markets – “Bottom of the Pyramid” – Reverse product innovation • Markets are rapidly growing for “social” products – A new generation of social entrepreneurs are embracing market principles – Corporations have largely sat on the sidelines p g y 20100616 – MadridExpomanagement.ppt 23 Copyright 2010 © Professor Michael E.

The Competitive Advantage of Nations.g.Creating a HealthyLocal Clusters Building Business Environment Improving Deficits in the Business Environment •Availability of qualified human resources •Access to appropriate education and training programs relevant to the business •Availability of efficient logistical infrastructure •Availability of credit for local organizations •Local research on products and processes addressing l dd i local needs l d •Local market organization and price transparency •Fair local competition (e.. the absence of trade barriers and market distortions) •Regulatory structure (e. 1990 20100616 – MadridExpomanagement.ppt 24 Copyright 2010 © Professor Michael E. land use.g. Porter .. resource use) Context for Firm Strategy Strateg and Rivalry Factor (Input) Conditions Demand Conditions •Availability of capable local suppliers and support services •Cooperates and business groups to enable collaboration Related and Supporting Industries •Product standards meeting the needs of local customers •Availability of local distribution channels •Quality certification organizations • Deficits in the business environment create internal costs • A strong local cluster enables productivity Source: Michael Porter.

Porter .Creating Shared Value Nestlé Nutrition Water Rural Development 20100616 – MadridExpomanagement.ppt 25 Copyright 2010 © Professor Michael E.

Adding a Social Dimension to Strategy • Customers and business partners value social performance.ppt 26 Copyright 2010 © Professor Michael E. Porter . not just economic performance • Companies can have the greatest societal impact in areas tightly connected to their business – This is where societal performance and economic p p performance intersect most closely • Societal improvements create shared value that drive the competitiveness of the business • Companies should incorporate a social dimension to their value proposition • Shared value can reinforce the company’s unique strategic positioning • This social dimension of strategy can be more sustainable than conventional cost and quality advantages 20100616 – MadridExpomanagement.

and highly motivated personnel Flat compensation structure Own seafood procurement and processing facilities to control q quality ( y (and p price) from the boat to the counter ) Heavy emphasis on environmental sustainability. and affluent customers who are passionate about food and a healthy lifestyle Distinctive Activities • • • • • • • • • • • Well-lit.” directed by employees to improve environmental performance All in-store materials are biodegradable – no plastic bags available and customers given discounts for reusable bags Emphasis on supporting community development • Successful future strategies will include social dimensions 20100616 – MadridExpomanagement. organic. Each store has “green projects. vegan. inviting supermarket store formats with appealing displays and extensive prepared foods sections Produce section as “theater” Café-style seating areas with wireless internet for meetings and meals Each store carries local produce and has the authority to contract with the local farmers. Company provides low-interest loans if needed. middle class. etc.ppt 27 Copyright 2010 © Professor Michael E.Shared Value and Strategic Positioning Whole Foods Markets Value Proposition • • • Natural. fresh. and prepared foods and health items with excellent service at premium prices Cater to specialized nutritional requirements (gluten allergies. Microcredit in supplier communities Information and education provided to shoppers along with products High touch in-store customer service via knowledgeable. flexible. Porter .) Educated.

most powerful force for addressing many pressing issues facing our society • A transformation of business practice around shared value will give purpose t f ti fb i ti d h d l ill i to the corporation and to capitalism itself. using the concept of shared value • Shared value arises from a deeper understanding of doing business that transcends narrower conceptions of economic efficiency that have guided company operations • Shared value thinking will provide new catalysts for global economic growth and the next wave of innovation and productivity in the global economy • Businesses acting as businesses.ppt 28 Copyright 2010 © Professor Michael E. Porter . and represents our best chance to legitimize business again 20100616 – MadridExpomanagement. not as charitable givers are arguably the businesses givers.The Purpose of Business • There is an opportunity to transform thinking and practice about the role of the corporation in society.

not less 20100616 – MadridExpomanagement. 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.ppt 29 Copyright 2010 © Professor Michael E. not near term stock price • S i opportunities f di Seize t iti for discontinuities which are more lik l t emerge ti iti hi h likely to • Strategy is more important in downturns.Strategy in Economic Downturns • Create a positive agenda • Refocus on strategy • Return to economic fundamentals • Downsize to a strategy. Porter .

Porter .Backup 20100616 – MadridExpomanagement.ppt 30 Copyright 2010 © Professor Michael E.

but ease of manufacturing • Fit is leveraging what is different to be more different 20100616 – MadridExpomanagement.Mutually Reinforcing Activities Ikea Ample inventory on site Suburban or high-access locations High traffic store layout Large stores with ample parking Self delivery by most customers Limited instore sales help Year round Year-round stocking to even out production Self-selection by y the customer In-house design of product families Designer identification of compatible lines 100 percent sourcing from long-term long term suppliers Low manufacturing costs Modular. design approach with attractive styles and materials High variety. Porter .ppt 31 Copyright 2010 © Professor Michael E.