competitive strategy michael e porter


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Let's talk about Strategy

I want everybody in this room to think about your company

and as we're talking,

this is not a theory,

this is about how to think about your own business and how you're developing how you're thinking about it the choices you're making.

What choices you're making

and so let's use this as a working session and then over the course of the day

we're going to hear from a number of other companies that are doing really interesting work

and hopefully we'll

cumulatively as a result of all of this. I think we'll all

enrich our understanding of this very very fundamental topic

Strategy

Now

What do we what have we kind of learned

about how to think about strategy.

Well, I think what we learned is that

the instinct that most

leaders have about success and

and most people actually have about success is dangerous is is

potentially distracting

What I find is that when when you ask a company what success looks like

The answer that you get, I get a lot is well, I want to be the best company in my industry

I want to be the best Bank, I want to be the best Auto company. I want to be the best

Consumer packaged goods company in this category.

I want to be the best that's success if I can be the best company in my industry

I will succeed and that is a very natural human way to think.

We all hope to be the best at what we do,

but in business competition and what we've come to understand is that's actually not the way to think about success.

The reason is that there is no best company.

So it's pretty dangerous to try to do something that's impossible. There is no best Auto company,

there is no best

Insurance company, it all depends.

It all depends there is no best, there's no one way to compete

The biggest mistake in strategy is to think that there's only one way to compete,

in every industry there are different ways to compete

depending on ...

What customer and customer needs you're actually trying to meet?

So when you ask them the question what's the best car or the best car company

You can't answer that because being the best all depends on

Who you're trying to serve?

If you're trying to serve young families being the best is different and if you're trying to serve people like me.

Serving people that want, you know

luxury and performance, to be the best at that is very different than providing a very very low cost efficient, you know electric vehicle

There is no best way to compete.

There are lots of good ways to compete depending on who you're trying to serve.

So the number one principle strategy is don't think this way

Instead what you want to think about is how can I in my company be unique?

How can I create unique value for the set of customers I choose to serve

Strategy is fundamentally about choice

It's making a set of choices and the most fundamental choice is Who am I trying to serve and

One of the worst mistakes in strategy is to try to serve everybody

You can't meet the need of every customer you just can't do it it's impossible

I've seen hundreds of companies try it's impossible. You can't meet all the needs of every customer

Fundamentally, if you have a strategy you've got to decide which needs of which customers

You're actually going to seek to me that you might be able to do

if you're clear about

where you're heading

Another tremendous mistake in strategy is to get into a competition with your competitors on the same thing

If your competitor is trying to be in the lowest cost it's pretty

Unusual to win if you then try to chase them and be low-cost

The essence of strategy is to find a unique position in your business that

delivers unique value to the customers you choose to serve.

Sounds simple

but most companies don't do it.

Most companies are confused they lack clarity on what strategy is

and

they and in many companies the there is a fundamental inability to make choices.

Which ultimately lead to lack of success.

Now again in a country like India where growth has been relatively rapid you can ride you can ride the rising tide and

do okay

But I'm talking today about the companies are gonna be truly successful truly successful not the ones that are just bumping along with the market

To be truly successful, we really need a strategy and that strategy isn't about just being the best

Now, you know the word strategy gets used a lot and and I always try to help

companies I work with and people I work with kind of have a clear understanding what we mean by a strategy. Here it is

Strategy is a set of choices we make

Long-term choices

to distinguish ourselves from competitors. That's what it's all about.

It defines how we're going to compete differently

and

It also really articulates the competitive advantages that we will seek to

create and use in order to win

Okay, so at a very high-level, this is how I would define strategy

Again note the word long-term

Strategies about long term it's not about tomorrow and the next day

It's about the long term because strategy takes a long time to put in place and implement

Strategies about distinguishing yourself being different

If you're doing the same thing as your competitor, you don't have a strategy

You're just trying to do the same thing better

That's what we call operational excellence. We'll talk about that in a minute

Strategy is around choices what choices you make versus the choices that your competitors are making

Strategy then is different than just we want to be number 1 or number 2. That's not a strategy

Wanting to grow faster is not a strategy

Those are goals, those are aspirations the strategy is the unique position that allows you to get to whatever goal you set

We can't confuse the strategy and the goal

We can't mix them up. We have to separate the goal we're trying to achieve and then the strategy is how we're gonna get there

Strategy is not just one thing one step, strategy is not to go international. That's not a strategy

You know raising R&D is not a strategy. Strategy is holistic

It's the whole set of choices that you make collectively in order to position the company for

success over time in the marketplace

It's not just it's not one-step it's a set of steps

Strategy involves all the functions. It includes marketing production finance everything

together

to create that unique positioning that's what strategy is all about and

strategy isn't vague

It's not a mission statement

It's very specific as we'll see

So here's where we start with a sort of we

we all have to get grounded in in a clear idea of what we actually mean by a strategy and

Once we start there, then we can start making doing the analysis and making the choices necessary to get there

now many of you are are public companies and

here we have an additional issue that a lot of companies get confused about and

that is if you're a public company, we have a stock price and

we you know, everybody looks into stock price and

What we what we also have to understand if we're going to set a good strategy is actually the stock price is not the goal

The stock price is a result

The goal is superior economic performance

strategies about creating superior economic performance in

terms of return on capital and in terms of growth

Not one year but on a sustained basis

Okay, and what we know is that it's economic performance that really creates value

Price can go up or down depending on what happens in the world

That doesn't mean that value changed

The value is actually created by the economic performance

The ability to be profitable and earn a good return on capital and grow that business

Well, we've got to remember is when we set strategy we have to focus on the economic performance part

We can't try to please the stock market

We can't try to figure out what today investors want that's gonna confuse us

It's going to pull us away from where we want to go

So I think you know critical for a for strategy particularly in public companies is the idea that actually performance

Determines shareholder value not the other way around

You'd be surprised this sounds awfully simple, it's not

I work with

hundreds of public company CEOs and

they get all confused about well, who?

what's what's the scorecard here? And

and the stock market is is sort of a long-term works pretty well as a scorecard if you have good economic performance

eventually your stock price goes up

But in the short term stock price is a lousy way of judging success

The markets can be way off

That's what we find in the studies on this question

So we're this is all about long-term sustained economic performance

and we should have the courage to let the stock price take care of itself and

Not try to get crazy

trying to please the analysts or

Deal with whatever criticism we're getting, you know in the stock market

Now when we think about strategy again another key principle and then we're gonna dig in a little bit is

Strategy occurs at multiple levels in any company in many companies not every company

The core level strategy is what we call business strategy

That's how to compete in each or in the distinct business in which you operate

So here if you're in passenger cars, you'd have a strategy for passenger cars

That's business strategy, but there's in many companies. There's another level of strategy which is what we call corporate strategy and

That has to do with the overall strategy of the diversified or multi business company

We got a lot of conglomerates. I don't like the word conglomerate

Conglomerate is not a strategy

We've got a lot of companies though that are more than one business

We got to have a strategy for each one of the businesses

Because that's in a different market competing in a different way to serve different customers

but we also need to think about the overall strategy of the diversified group and

that is a very different animal and

There's a new there's this new set of principles or a different set of principle for thinking about that

Again I

Find a lot of confusion a lot of companies mix these up together

Corporate and business get mixed up. That's a mistake

We've got to keep these levels separately and we'll talk about these briefly as we have time

now let's talk about business unit strategy and not go quite quickly because

Again, I'm hopeful that most of you are pretty well grounded in the key ideas here

so what we understand is in it can in a business a

particular business

The drivers of success and the key elements of strategy have to do with the industry itself the business itself and

the position we choose to occupy in that business

Strategy is both together. Ok

What we what we understand is that industries are different in terms of the nature of competition

And we got to understand our industry. We got understand how its

Competition is evolving

Where it's heading?

And what kind of competitive dynamics are we gonna have to contend with?

We've got to understand that business by business and then of course we have to make those choices about where we're going to compete

But one of the things I I find over and over again is

Often the health of your industry is just as important as how good a position you have

If you're in a industry that's in trouble that's failing

You may have a great position but that's not very valuable so so we got to learn to worry about our industry, too

We have to help our industry thrive not just focus only on our own position again

These are things that we've learned from many many many examples. In terms of industry analysis hopefully everybody finds this familiar

You know we after you know 20 or 25 years of work we have

overwhelming evidence that really industry competition is driven by

these

competitive forces

That we introduced many years ago now

Those competitive forces collectively drive

The fundamental attractiveness of the industry, the average profitability in the industry

Yeah, yeah, here's a simple example in the heavy truck industry and in our country

very difficult industry if you look at this industry you see a lot of

Competitive forces that are challenging

We have a lot of vicious vicious competition on price

Among the truck manufacturers

We have some high regulatory standards which are pushing up their cost

To meet those standards, but it's very hard to pass those cost on to the customer because the customer is

consolidating

Into large or larger fleets and leasing companies that have a lot of bargaining power in order to push down the price

So the combination of rising regulatory costs and a powerful customer is squeezing

the truck manufacturers

We see that to make heavy trucks you make some of the parts in-house some companies make more some companies make less but you're

so having to source things like engines and

Drivetrain components axles and things like that and many of the suppliers of those

Components that you're buying have very strong brands and in fact the trucking company

Specifies the brand of the parts that they want on the truck

Now they want a Cummins engine. For example

So you're so you're buying from suppliers who have a lot of clout

Because they have their own relationship with the end customer

So that squeezes the truck companies the truck manufacturers in the middle

This is in in in in North America

Primarily but the same basic structure exists in many other parts of the world

It actually isn't that hard to enter in the industry

And the threat of entry and entry barriers are a key part of industry analysis

And you know it's actually harder to get the dealer network than it is to actually get the parts and assemble the truck

And then of course trucks are always competing with substitute substitutes

Yet all of us hopefully understand what a substitute is a substitute is a different way of meeting the need

That's not this is the same as your product but meets the same need that your product does

So if you're trucking if you're a truck manufacturer

You know, the customer doesn't need a truck if they're going to use the railroad

or if they're going to use water transportation, so

particularly

You know as railroads railroads have been a real tough competitor for trucks

Over the years. Okay, so

This is a classic example of industry analysis. It's something that is timeless

Always every single time you think about strategy you have to have a systematic rigorous

Understanding of your industry and what are the competitive drivers?

And how are they changing are they getting worse than getting better where where's the new competitive force coming from

That you're gonna have to deal with if you're gonna if you're gonna win in that particular industry

You know, here's another example of

an industry

industrial gases

The this industry makes oxygen hydrogen

argon, all these industrial gases that are increasingly used in production processes in all kinds of other industries and

What your first look at this industry says, oh my god do I really this is a pretty tough industry

Because I'm selling industrial gases that are commodities

Hydrogen is hydrogen

How can I ever make money just selling a commodity gas?

Particularly when I'm selling to a lot of customers who often have bargaining power they're big manufacturing companies

Industrial gases are made with feedstocks like, you know petrochemicals and I have no control over the price of the feedstock

So if the feed stock price goes up, I'm in trouble if I'm selling a commodity gas

Again not so good element of the industry

You know, it's not not that hard to get in I mean lots of people can figure out use the

figure out how to make helium or hydrogen

and

Have a little facility in the in the in the factory

And many of the customers decide. Well, this is not something I want to buy. I want to make my own industrial gases in-house and

Make them right right in my factory right on the production line. Ok. So again, here's an industry your first look

says

Not so good.

I don't want to play here. That's your first instinct

but again what we learn about industry analysis is we've got to we've got to

be sophisticated

We can't just take the superficial look at the industry, we've got to dig down a little bit and

if we dig down in this industry, what we've learned is actually it's quite an exciting and interesting industries

in fact the companies in this industry have done very well

and the reason is that the superficial look doesn't really get at the true industry structure

so just an example is the

Probably the most interesting thing about the industry is that the cost of transportation are very high?

To move gas from your plant to your customer takes a big truck

It's very expensive to ship

It's got to be shipped under pressure

And you have to kind of have a big tanker truck and it has to go to the customer side and it has to unload

the gas through you know pumping it into the tank there and

Transport cost

Means that in order to be efficient in this industry, you have to have density of customers

so if you have you have only one customer in Mumbai and you have to drive all the way to Mumbai for one customer and

spend all that money to drive that truck full of helium here and

you get to

Offload a little bit for one customer. Your costs are going to be very high

but if you come to Mumbai and you have

17 customers and your trucks from one to the next to the next and they're all close by

Then actually that makes your business super efficient

Compared to the guy who's only going to deliver to one or two customers

Transportation costs take a very superficially lousy industry and make it into a very attractive industry

Because all of a sudden

If you have a dense group of customers in a given market, it's almost impossible for your competitor to attack you

It's just too expensive. They'll never they'll never be able to afford to win those customers

and it creates a lot of

Because you've got to build a customer base over a long period of time

and this is a very critical product for the manufacturing process so you don't want to

try some newcomer and not be sure that they'll show up if they don't show up with your helium, you're in trouble

in your plant

Okay. So again, I won't go through the details

But what I'm trying to get across here is that we all have to be really sophisticated at industry analysis

in our businesses

We got a look below the surface. We can't we can't just say oh, this is a commodity. It's allows the industry. Uh-uh

It's a commodity. It's quite an attractive industry dig down understand the real entry barriers

Understand that the the real bargaining power of the customer and the supplier

And and and the people that could see this

have built tremendous businesses in

industry that nobody else wanted to go into

for the stock market thought this was a crummy industry for a long time boy, were they wrong

The investors that could understand how attractive this business was boy, did they do well

again

You know what?

What we find in in competition is the that actually the concepts themselves are not that

complicated but actually applying them well is really hard and

That applies both to the companies but also to the investors that are trying to figure out whether a company is successful

or will be successful

How do we achieve superior profitability in the industry

Whatever the industry attractiveness looks like well that has to do with with the two fundamental types of competitive damage

And and this never changes and never will change there's only two ways to get in advance one is to differentiate yourself

Do something better?

Customer will pay you more for it

Because you're delivering some something the customer thinks is better

It could be designed it could be image it could be

functionality, it could be service. It could be almost anything

But you know competitive advantage number one is differentiating and getting a higher price

and

If you're differentiating you better get a higher price

Because if you're not getting a higher price, then you have to ask, are we really differentiating if nobody's willing to pay us extra?

are we really better and

That's a kind of a tough honest question we have to ask ourselves. The other kind of competitive advantage is lower cost

If we can actually do something cheaper and more efficiently

and and that's not just luck that's not just oh we bought a lower cost

parts this week

But if we can find a way of structurally being lower cost because we've redesigned the way we do things

That's the other kind of competitive advantage

And really the broadest thinking about strategy starts with okay which path are we on?

Are we we on the path to differentiate? Are we on a path to be the lowest cost?

Those are both good pass

depending on the circumstances

but we we gotta usually decide which path we're gonna be on because if we're gonna really differentiate and

have better quality and better service and

You know better educated Salesforce. It's gonna be hard to at the same time be lower cost

That's what we've learned so we've got to figure out what path were on

And then we have to turn it into a strategy

using the value chain

And again, I hope everybody here is familiar with that concept

it's quite embedded now and management thinking the value chain says

You know for any business

there's a whole set of things that

we have to do in order to conduct that business

Logistical things, operating things which could be manufacturing, marketing, sales service, supply chain

Technology development you see this and and this this this idea called the value chain is a way of mapping

What what operation in this industry looks like?

And this slide is just an example in the telecom in the mobile communication business

So a sprint or an AT&T in our country, here's the value chain in that business

So you can see if you go back. This is sort of a general set of titles, but this says okay now in

mobile phones

We don't say we have to talk about device coverage

What set of

mobile phone

Types, do we support in our network? And then there's kind of we got to have a network

We got to operate the network and make that network efficient

So you get you get the bars and you don't lose your service and you know

you can here and and

so forth and then we got to figure out how to price pricing is very complicated in mobile phones all kinds of special deals

prepaid, postpaid

So there's there's a lot of choices in activity there, bill processing, there's a lot of marketing, promotion, PR

After sales support and so forth. So every business has a value chain

Every one of your businesses has the value chain and if you're going to be disciplined and rigorous about strategy

You've got to you've got to really lay out what that value chain is

because strategy is

fundamentally the set of choices you make across the value chain

So what kind of network am I going to operate

What's my pricing approach

How am I going to distinguish myself from a competitor? You know, what what tools am I gonna use for marketing?

Am I gonna have a lot of physical locations and stores or I'm going to use primarily?

Advertising what am I going to do to market my service versus the other guy and so forth and so on

Strategy isn't sort of any esoteric thing. It's simply a set of choices about how we are going to operate the business

Including choices about the technology we're gonna sell you know,

The function of our product the features of our product the technology of our product

and

A good strategy is one where there's clarity on the choices we are really making

and

There's enough things that we're doing differently that we can get a competitive advantage

So let's talk a little bit more of that about that

The first kind of key idea here in going from kind of a value chain to strategy is the notion of operational effectiveness

versus strategic position

This is a idea that I didn't have when I first published my first work books in this field

I was thinking mostly about strategy but but I I didn't really make make the distinction

That there's a lot that a company does that isn't strategy

There's a lot of best practice

If we're going to be in the auto industry, there's a lot of things we have to do just to be a good auto company

You know, we have to buy the right kind of machines for our factory

we have to have you know, a decent dealer network we have to

You know learn how to execute good advertising. There's a lot of best practice in every industry and

What we've learned is if you're not using best practice, you're gonna lose

No matter what your strategy is

If you're not buying the latest manufacturing equipment your competitors are gonna win

You're gonna you're gonna you're gonna give up too much cost and quality through that

So what we have to understand is in any company, we have two jobs one is we got to implement all the best practices?

That we can find

If we see somebody doing a better approach to customer, you know customer care

You know, we better look hard at that and make sure that we're at least at some, you know, threshold level of best practice

That's operational effectiveness

But operational effectiveness is not strategy

Operational effectiveness is doing the same things as your competitor, better and better and better

It's raising the bar on the same things as all your competitors are doing. Your competitors have a factory they have machines

If you buy the newest machines first, then you'll have an advantage you'll be operationally better than them until they buy the machines

But that's not strategy

Strategy is on top of operational effectiveness

you've got to sort of operate the business well, but on top of that you have to have a strategy and

that strategy is building on the best practices, but then including the choices that

are going to define your uniqueness

in the business

Both of these things are important if

we're just sloppy and not

enhancing our operation operational effectiveness, we're gonna lose. No

matter what strategy we have?

But just being operationally effective is not going to get us to superior performance

because all our competitors are going to be

implementing the same best practices as we do

So if we really want to win we got to do both and we've got to make sure that we're clear about

What we're doing?

And this is a very very important distinction

You know the question I used to get all the time, you know, 15 years ago 10 years ago

can you be both low cost and

differentiated at the same time and

The answer is usually you can't

But the cases that look like you're doing that are cases where the competitor has lousy operational effectiveness

Then you can be both low cost and differentiated

But if you've got a good operationally effective competitor

Then to differentiate or to be lower cost you're gonna have to make real choices

Okay, and you're not going to be able to do those both at the same time

Probably you're gonna have to decide which path you're on

Am I on the path of differentiating? Am I on the path of being the lowest cost producer?

To have a successful strategy

We've come to understand that the process

Involves, you know these basic conditions

Number one, to have a truly successful strategy, we have to define a unique value proposition

We can't just be trying to do the same thing as our competitors are trying to do

We have to be doing something unique and that involves

Serving a different set of customers

We're going after the large industrials, our competitors are going after the medium-sized smaller companies

That's one part of the value proposition. What customers are we actually trying to serve?

Again so many companies the customers they have they sort of got by luck

But most important ideas in strategies you've got to choose your customers

you actually have to choose who you want your customers to be and

If you choose I want all customers. I want to serve every single customer. That's usually not a good choice

Because customers have very different needs

Particularly in a complex economy like like this one

You know another another

Question, you've got to ask of the customers I choose to serve which of the needs of that they have do I want to actually

meet uniquely well

Again a lot of companies just fall into the idea that anything the customer wants, I'm gonna try to provide

But actually, you know, most great strategies don't do that

Or at very least they're very specific about which customer group and then they say, okay, I'm gonna go after this customer group

And I'm going to then really meet all their needs

But the idea that we just try to meet all the needs and anybody ever comes and asks us to meet

that's usually not a good strategy and

Then we're gonna have to make that choice about pricing

Are we going for a premium price or we try just to match the other guy?

Or are we going to offer discount because we think we're going to be more efficient and able to sustain that

discount and still make good profits

You know, this is a company that's on its way to India. I

Don't think it's actually opened yet. It's been struggling to get into India like

historically number of companies have to have had to do this is one of the most extraordinary companies in the world in the area of

furnishings

IKEA some people call it IKEA. It depends on are you speaking more Scandinavian and are you speaking more American?

And this is a company that that sells home furnishings

And this is kind of a great strategy example

Strategy starts with a unique value proposition and

What you see here is kind of a sort of simple description of what their value proposition is who are the customers?

That they really are seeking to serve and what are they delivering those customers in terms of

Products to meet those needs and where are they pricing?

Okay, so I will I won't read this

But just take a quick look at that. Okay, and

You know

The interesting thing about this value proposition is nobody had ever seen this before this company

Nobody had ever

segmented

customers in this way

Nobody had ever thought about customers with relatively small living spaces before this was an innovation in thinking about

segmentation

and a lot of great strategies involve this new way of looking at customers and segmenting customers like these guys did

Also, this strategy was a real breakthrough in

You know kind of operations for a furniture company and we'll talk about that in a minute

Here's another great strategy example remember I talked about heavy trucks

earlier and

How difficult in industry it was the average profitability not so good

Well, here's the company in the industry that is the premium superior high profitability company. It's called Paccar

it's it's it's quite a global company and

You sort of see what their value proposition was

So IKEA was about really low prices this company is about a premium

We're gonna get a premium 10%

for our trucks

Because our trucks are not going to look like our competitors trucks our trucks are

We're going to have a we can have a strategy in about customization

Cost of operation that will allow us to actually differentiate

But not for all customers

This is a wonderful strategy because this company figured out that the big customers in the industry

Weren't the customers that were the good customers for them. They actually figured out that the small customers

The people that owned one truck and drove that truck for their living

That was that was the really interesting customer in this industry

So they built the whole strategy around this narrow group of customers about 25 to 30 percent of all the customers that buy trucks are

buy one or two trucks and

They often drive their own truck. Okay

Second

Test of a great strategy again. Think about your own company here a

Distinctive value chain, if you if you don't operate the business differently

Your value chain isn't going to be real

You've got to have a different operating model that aligns with your positioning

Ok, so if we take IKEA and I won't go through this if you look at how they operate there their company compared to

all the other companies in their industry they do it differently

They have a different value chain

Their stores look different their customer service looks different

Their logistics looks different and it's all aligned with that value proposition

They're their breakthrough idea was that they wouldn't

that they they sell

not fully assembled furniture they assembled parts

They sell parts in a box

so when you go to IKEA

You buy you walk out with a box in which there are the parts of the furniture. You just bought and

You get the opportunity to actually take the furniture home yourself

You don't get somebody with a van, you know delivering dropping off completed furniture at your house

IKEA understood that that was that was good most a lot of customers like that

But the customers they liked they wanted to serve who was very price-sensitive

They were willing to deliver themselves

They would they would deliver their own furniture

And by by doing it that way and by also having inbound logistics

in

Not entire sofas, but the parts for a sofa in a box

they saved huge amounts of logistical costs and

They took that savings and

They passed it on to the customer in terms of much lower price, but the customer then had to put the furniture together themselves

I have a daughter one of my daughters

happens to love this company and I had the privilege of

helping her

You know renting a car when I visit her at college so that we could take the box home

For my IKEA ... I went to IKEA many times

and and then you have to take the box home and then you have a

You know, then you get to put it together. It's like somebody's birthday. You have to put together the birthday present, you know, or

Christmas it's like putting together the toys

And you know, that could be fun. I frankly found it very tedious

I have a lot of fun doing it, but my daughter really liked this company the value

proposition worked for her

It didn't actually work for me. In fact, I pretty much hated every minute. I was in that store.

I didn't like the service, there is no service.

They deliberately organized the store so you get lost and you

can't get out

When you're checking out you have to go to this these big huge racks and and and you have to pull down the box of

what you're buying and

Then schlep the box

You know

to the check-in counter and then pay your bill and then you have to take the box out and load it in your car and

then you have to drag the box up to the apartment of your daughter in my case and

Then you get to spend 30 or 40 minutes trying to figure out how to put the thing together

Not a good idea for me, my daughter loved it

It was it met her needs for reasonable price

They have very nicely designed products and style products very Scandinavian

But they're very low-cost. They're really high quality

really low cost that worked for her and

this tells you something very important about strategy and

that is that one of the things a great strategy does

is it doesn't please every customer

If you're trying to please every customer

You don't have a strategy

A good strategy makes some customers unhappy

If every customer is happy you're in trouble

If every possible customer in the industry likes what you're doing then the odds are that you'll never really be successful

Strategy is fundamentally about choosing

who exactly you are trying to please and then engineering a value chain in order to deliver on that?

Here's here's Paccar, you know another critical part of a successful strategy is the concept of trade-offs a

Trade-off is where in order to deliver one benefit you give up on another benefit

and that's what IKEA did you know, they

to get that really low price of

nicely style furniture and

in order to do that you had to go through an awkward experience in the store

You had to take the product home yourself, and you had to put it together yourself

And that was a trade-off that they were willing to make

because they understood that's what their customers really ... that was the trade-off they wanted to make

Strategies about choice

About choosing what you want to do?

But one of the phrases that I

Said at some point and I found has been very powerful is the essence of strategy is what you choose not to do

It's the service you don't offer it's the functions you don't provide

It's the benefit you don't offer

That's the essence of strategy if you can be clear about that

That's a good sign that you can be clear about your overall strategy

Okay, so time is very short

But in terms of a successful strategy we've got to connect the dots across the value chain

You got to make sure the service

connects with the way we mark it connects with our

Kind of product value proposition the pieces fit together across the value chain

And there's continuity you

Can't be changing strategy all the time. It takes like two three years to implement a strategy

Because you've got to get all those pieces aligned around what your what your ultimate position is

And continuity becomes crucial okay again, you can look at some of these examples and talk about it even further

When we think about strategy one of the things that I you know

I find very helpful to think about and might be helpful for you is

what kind of competition are we creating in our industry and

And the wrong answer is we're creating a zero-sum competition we're all doing the same thing beating each other up on price

That's not the competition we want

But we want to create is really more of a positive some competition where we're all have a different strategy

We're all trying to do something a little bit different. We're serving different customers. We're trying to meet different needs

That's the kind of competition we want

That's the competition. We're actually the whole industry can be more attractive and competitors can do well in

terms of corporate strategy

Again, I've already covered the idea that there's multiple levels if you're in a very large group, there might be a third level

There might be groups of businesses

Clumped together because the old company and the whole company has so many businesses that to manage it. You've got to clump it into groups

So there might be a level of group strategy

You know, what are the key questions of corporate level strategy, you know, first of all understanding what different businesses you're in

Becomes really critical

Because you need a strategy for each distinct business and sometimes companies get confused

In fact what I find is usually you think of your business too broadly

and don't realize that actually the truck industry is not one industry, there's heavy trucks and

light trucks and those are totally different businesses

So, you know key question for corporate strategy is sorting out what the different businesses are

Do we have the right portfolio?

Is each business attractive in of itself? and then do the businesses ..

Are we the best owner for the business?

Does the business reinforce each other?

Do we have synergy?

Is there a logic for how the businesses fit together?

and so on okay. This is kind of these are the key questions of corporate level strategy. It's a different animal

It builds on business strategy, but it's different

Ultimately in corporate strategy were trying to create synergies across businesses

If there's no synergies, we're probably better off

You know selling it

Because we're not going to be able to add any value

And this just talks about the kind of synergies that we might be pursuing and we got to make sure they're real

We got to make sure they're actually meaningful they're not just a little benefit but they're big deal

You know, here's the ultimate synergy company

Disney that that has many many different businesses, but they're all united in a common

Positioning

basic value proposition

They're sharing lots of resources like characters and and and and and you know video

properties and so forth leveraging across all these businesses

and this company has been remarkably robust in a very unstable industry where

Where some years you make a good film then actually make a lousy film people go up and down, but Disney a real robust

Corporate strategy that's given them a lot of resilience over time

And then I guess let me finish up this section

By talking about well, what's our job as leaders in strategy?

and

What I found is that the head of a business unit

You know and and the CEO of the overall corporation ultimately you have to be the chief strategist

The reason is that nobody else

has the right perspective for strategy except the ultimate

leader

Everybody down in the organization is

thinking about their part of the company their business their function the marketing department the production department the R&D

The only person that really has the true strategy perspective is the person that's actually running the overall business

So you've got to use your people to get information, you've got to make it a team process, but ultimately you have to decide

Strategy can't be a popularity contest where everybody gets a vote

Because essence of strategy is about choices and

We've got to make one

Clear set of choices. We can't we can't have sort of

Oh, well, we'll do this and we'll do this and we'll do this and we'll do this. Oh, yes marketing

I know you want to do this. We'll do a little bit of that too

you will end up in ... you're not going to do well, you're not going to have a strategy

You as the CEO got to make sure that you have a great strategy process

You got to make sure that first of all you've got the right business units organized and they've got a got

You've got a great team working on a strategy for each of those business units

You got to make sure they're answering the right questions

You shouldn't ask the question of how much is the industry going to grow for the next ten years and think that's the key question

That's one question

... a lot of other key questions every strategy has to address, the industry

where do we stand today? How would we benchmark our performance across the value chain who is a competitor our key competitors?

How are they doing? Where do they stand what are their value chains look like?

there's a lot of key questions in a good strategy and

the only person is going to make sure you have the right questions is you

Because you're the person that's actually in charge of pulling it together and making the choices at the end of the day

You know, you got to make sure the right

people are involved in the strategy process?

you know, that's your job as a leader and what we know is strategy has to be done collectively by the

multi-functional team. A strategy to each functional department and

let them do the production strategy and the marketing strategy and the service strategy that never works

We've got to get those people together doing the strategy together

Because all those pieces have to fit together

You you know, there's no such thing is good marketing

There's only good marketing for a particular strategy

So we can't let the marketing guys go running off and do good marketing

we've got to put their

Role in the context of the overall positioning. We're trying to achieve in the market

That's that's what great strategy is all about and guess whose job it is to make sure that happens you

The person who has the overall holistic perspective of the business

You know your board of directors we found you need to have let your board of directors

See the strategy before they have to approve it

Board of directors want to participate in the process now

it's not their job to develop the strategy, but they're usually smart people and it's very helpful to get their input and

then you can come back to them with your what you want them to approve

And as long as they've been part of the process and felt like they got some ownership in the process

They're gonna be really comfortable. But if you just show up one day and say here's my strategy everybody vote. Yes

Then you're gonna you're gonna erode your

Capital with the board and

you're going to need the board to support you because every company has ups and downs and

You need the board to be there and understand

What are you doing and how you're doing it? And so that when things go wrong, they don't panic

And if the stock price goes down they don't freak out

A great strategy needs the commitment of the board

The awareness of the board the understanding of the board and so how to bring them into the process without them thinking they do it

You know, that's your job as a leader

And depending on your company and and how serious your issues are you've got to calibrate

How much you want to play directly in the process?

Versus kind of sort of oversee the process and and that really depends on the situation

You know, if you've got a real turnaround you're gonna have to lead the whole process

If you've if you've come in and in a really bad situation you're just got to lead the whole thing

Don't delegate it to strategic planning

But you know if you're in a pretty stable company

you've got a good team then your job is really to set the right process up and

then check in and see how they're doing

One of the things we've learned I've done a lot I've trained now probably, you know

350 of the top CEO in the world they come to Harvard for a bootcamp

We call it the new CEO workshop and when a CEO gets appointed

We invite them and we have about a dozen, you know

Two or three times a year come together as a group and we go through you know, okay

What do you have to do to be a successful CEO?

and we know a lot about that and we go through that process and

one of the things we we do in that workshop is

we we talk a lot about why a great leader

doesn't want to have to reject the work of his team or her team

And the worst thing you want to have to reject is the strategic plan

People do a lot of work

They think very hard they get themselves all excited and they come together with a great plan and they're presented to you

the worst thing that you have to do is say no

Because if you reject that plan

First of all, it's a reflection that you created a lousy process the wrong people the wrong questions

It's also a sign that you didn't check in to see if they were moving in the right direction you

want to make sure that they're thinking the right way, they're on the right path

Encourage them to you know, don't do it for them, but check in

What you want to do in a strategy process is you want to be

really happy and say that's a great work. That's great work and

then you're gonna motivate your team to really be responsible and to really move the business forward

but if you reject their strategy

Because you didn't really pay much attention to what they were doing

And you just you're just having the meeting, you know at the end of six months

Then what's gonna happen? You're gonna have to do it

Every one of your team is always going to want you to approve anything before they do too much work on it. They're gonna create

Dependence on you as the leader

So as a leader one of your most critical jobs is to essentially create the right processes

to allow your team to succeed and

Check in

So that if people get off on the wrong track that you're not comfortable with you don't have to reject their work at the end

What you want to do is the CEO is you want to celebrate the work of your team

You want to celebrate the strategy that they've come up with

that you're that you're comfortable with because you were you were there and you

orchestrated the process and you checked in and you you gave feedback and and and the group learned and and

Here we are with something great

That's what strategic leadership is all about at your level. The people most of you in this room are at that level.


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