Strategy and the Internet: The New Learning

Transcription

1 Strategy and the Internet: The New Learning Professor Michael E. Porter Harvard Business School PTC Presentation Bocconi University, Milan December 3, 2001 This presentation draws on ideas from Professor Porter s books, in particular, Competitive Strategy (The Free Press, 1980), Competitive Advantage (The Free Press, 1985), What is Strategy? (Harvard Business Review, Nov/Dec 1996), Strategy and the Internet (Harvard Business Review, March 2001). and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter.

2 The Fundamentals of Competitive Strategy Setting the Right Goals The creation of economic value depends on the ability to produce goods and services that command prices greater than their full costs The central goal of a firm must be superior long-term return on investment Other goals and metrics (e.g. eps growth; pro-forma operating cash flow) carry grave risks for strategy Prevalent accounting adjustments to reported profitability tend to obscure true economic performance Current shareholder value should not drive strategy directly. Sustainable shareholder value depends on economic value 2 Copyright 2001 Professor Michael E. Porter

3 The Fundamentals of Competitive Strategy Determinants of Profitability The fundamental unit of strategic analysis is the industry Company economic performance results from two distinct causes: Industry Structure Relative Position Within the Industry - Rules of Competition - Sources of Competitive Advantage Strategy must encompass both 3 Copyright 2001 Professor Michael E. Porter

4 Determinants of Relative Performance Types of Competitive Advantage Differentiation (Non-Price Value) Competitive Advantage Lower Cost 4 Copyright 2001 Professor Michael E. Porter

5 Competitive Advantage and Activities Firm Infrastructure (e.g. Financing, Planning, Investor Relations) Support Activities Inbound Logistics (e.g. Incoming Material Storage, Data Collection, Service, Customer Access) Human Resource Management (e.g. Recruiting, Training, Compensation System) Technology Development (e.g. Product Design, Testing, Process Design, Material Research, Market Research) Procurement (e.g. Components, Machinery, Advertising, Services) Operations (e.g. Assembly, Component Fabrication, Branch Operations) Outbound Logistics (e.g. Order Processing, Warehousing, Report Preparation) Marketing & Sales (e.g. Sales Force, Promotion, Advertising, Proposal Writing, Web site) After-Sales Service (e.g. Installation, Customer Support, Complaint Resolution, Repair) M n a i r g Value What buyers are willing to pay Primary Activities Companies are collections of discrete activities, in which competitive advantage resides 5 Copyright 2001 Professor Michael E. Porter

6 Determinants of Relative Performance Operational Effectiveness Strategic Positioning Assimilating, attaining, and extending best practice Creating a unique and sustainable competitive position Do the same thing better Compete in a different way 6 Copyright 2001 Professor Michael E. Porter

7 Creating a Strategic Position Neutrogena Soap Mix of Value Mild, residue-free soap formulated for ph balance Activities Eleven ingredient formulation to minimize skin irritants Two-layered packaging Slow, controlled molding process Distribution only through drugstores or the drug section of combination stores Premium price No/few price promotions Detailing to the medical community Attendance at dermatology conferences Fact-based consumer ads Advertise in medical journals Advanced skin care research (Neutrogena SkinCare Institute) 7 Copyright 2001 Professor Michael E. Porter

8 Tests of the Existence of a Strategy Different value proposition / desired mix of value Different value chain 8 Copyright 2001 Professor Michael E. Porter

9 Positioning: Variety-Based BMW Set of Activities Particular Product Variety Active driving design philosophy Highly unique product and engine performance Centralized engineering Long product design cycle Extreme customization of customer orders High craft labor input in production with selective automation High vertical integration to achieve proprietary components One global brand Limited dealer system Non-traditional, brand-focused marketing BMW-sponsored race team Superior-engineered, high performance, sporty automobiles Source: Draws on research conducted by Harvard Business School students M. Collardin, F. Cueto, J. Encinar, A. Gonzalez, A. Kulyk, and D. Smith, April Copyright 2001 Professor Michael E. Porter

10 Sustaining a Competitive Position Requires Tradeoffs Choosing a unique position is necessary but not sufficient to create a sustainable advantage because of the threat of imitation Imitation takes two forms: Repositioning Straddling Traditional thinking focuses on competitors ability to imitate Equally, if not more important, is whether competitors want to imitate Tradeoffs are incompatibilities between positions that create the need for choice Strategic tradeoffs lie at the heart of sustainability 10 Copyright 2001 Professor Michael E. Porter

11 Strategic Tradeoffs Neutrogena Soap Forgo cleaning, skin softening, and deodorizing features Bear higher costs through the configuration of: manufacturing detailing medical advertising skin research Forgo the ability to reach customers via: price promotions television some distribution channels 11 Copyright 2001 Professor Michael E. Porter

12 Recent Thinking on the Sources of Competitive Advantage Core Competencies Critical Resources Key Success Factors 12 Copyright 2001 Professor Michael E. Porter

13 Southwest Airlines Activity System No seat assignments No meals Limited Passenger Service No baggage transfers No connections with other airlines Frequent, Reliable Departures High employee compensation 15-Minute Gate Turns Lean, Highly Productive Ground and Gate Crews Limited use of travel agents Automatic Ticketing Machines Standardized fleet of 737 aircraft Very Low Ticket Prices Short-haul, pointto-point routes between mediumsized cities and secondary airports Flexible union contracts High employee stock ownership High Aircraft Utilization Southwest, the low-fare airline 13 Copyright 2001 Professor Michael E. Porter

14 Zara Activity System No media advertising Word-of- Mouth Marketing Prime store locations Widely popular styles Fashion at moderate price and quality Encourage repeat buyers Global team of trendspotters Extensive use of store sales data JIT delivery Use of advanced textile machinery Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS Very frequent product changes Production in Spain & Portugal, close to markets Ownership of production sites Very flexible production system 14 Copyright 2001 Professor Michael E. Porter

15 Strategic Continuity and Continuous Improvement A strategy is not fixed, but a direction the company is following Continuity of strategy contributes strongly to sustainable competitive advantage - e.g., organizational understanding of the strategy - clear identity with customers, channels, and other outside entities - time to build truly unique skills and assets related to the strategy - enhance fit Strategic continuity and continuous change should occur simultaneously. They are not inconsistent Continuity of strategy allows learning and change to be faster and more effective Continuity of strategy avoids the cost and confusion associated with frequent shifts in direction 15 Copyright 2001 Professor Michael E. Porter

16 Barriers to Strategy External Industry conventional wisdom leads all companies to follow common practices Customers request a full line to capture supposed purchasing efficiencies Stock analysts and peer pressure create strong forces to emulate the practices of successful companies Internal Faulty Management Thinking e.g., customer focus is misinterpreted to mean serving all customer needs Managers schooled in quality is free thinking believe that no tradeoffs should be made Biases in Cost Systems Inappropriate cost allocation is used to justify adding (or maintaining) new products, services, or customer groups Growth Pressures The desire to grow, often driven by the apparent saturation of a company s target market and/or the capital markets, leads managers to broaden the company s offering and undermine its uniqueness Organizational Incentives The path of least resistance is best practice improvement, which is far less organizationally challenging than choosing and maintaining a strategy The greatest impediments to strategy are often self inflicted, and many are internal Strong leadership by the CEO is almost a necessity if a strategy is to be created and implemented 16 Copyright 2001 Professor Michael E. Porter

17 Strategy and the Internet The Internet is an extremely important new technology The question is not whether to deploy Internet technology but how It was assumed that the Internet changes everything, rendering the old rules about companies and competition obsolete Many companies deployed the Internet in a way that undermined their industries, compromised their strategies, and eroded their competitive advantages The profitability of most Internet activities has been disappointing; many have been curtailed or shut down 17 Copyright 2001 Professor Michael E. Porter

18 The Internet and Competition Fundamentals The Internet is not an industry but an enabling technology There are no Internet companies, but companies using Internet technology to compete in particular businesses Dot-coms are not fundamentally different The Internet is creating new industries, but its principal influence is in reshaping competition in established industries to varying degrees more potential impact if the primary product is information vs. the primary product is a physical good Even when the Internet offers significant changes to the means of competing, it is not necessarily disruptive to established leaders 18 Copyright 2001 Professor Michael E. Porter

19 The Internet and Profitability Many Internet applications have long-run growth potential. However, rapid growth alone is not enough to produce an attractive business While the Internet is an improvement in technology, better technology does not necessarily lead to profitability. The question is who will capture the benefits of the new technology? The profit potential of Internet technology depends on how it affects the attractiveness of industry structure how it affects a company s ability to gain a competitive advantage These strategy fundamentals vary greatly by industry Notions such as B to C and B to B are meaningless for thinking about potential profitability 19 Copyright 2001 Professor Michael E. Porter

20 Applying the Internet: The Absence of Strategy Most companies fell into the trap of viewing the Internet as a stand alone opportunity, and competing solely on OE The focus was on maximizing revenue growth through price discounting, product line broadening, extensive promotions, channel incentives, and heavy advertising The aim was to create scale, gain first mover advantages, preempt the market, and accumulate customer bases Companies sought to capture the entire market (ideally a large one) to justify large up-front investments, instead of establishing uniqueness and making tradeoffs to serve a well chosen sub-market Without a clear strategic positioning, competitive convergence resulted A destructive, zero sum form of competition was created Low price was defined as the primary customer value instead of specialization, convenience, service, or other forms of differentiation that justify a higher price. However, price advantages were not sustainable Most Internet-based companies competed in ways that undermined the inherent attractiveness of their industries, and created a destructive competition that is hard to reverse 20 Copyright 2001 Professor Michael E. Porter

21 The Internet and Industry Structure Automobile Retailing Threat of Substitute Products or Services Bargaining Power of Suppliers Rivalry Among Existing Competitors Bargaining Power of Buyers (-) Auto producers are tempted to use their web presence to offer direct sales (-) New competitors from different locations enter the market for local customers (-) New entrants have fewer dimensions to differentiate themselves (showroom, service, ) shifting the basis of competition towards price (-) More market transparency for customers Barriers to entry (-) A flood of new referral networks (Auotweb, AutoVantage) and online direct dealers (Autobytel.com, AutoNation, CarsDirect.com) has entered the market 21 Copyright 2001 Professor Michael E. Porter

22 The Internet and Industry Structure: Typical Impacts Threat of Substitute Products or Services (+) By making the overall industry more efficient the Internet can expand the size of the market (-) The proliferation of Internet approaches creates new substitution threats Bargaining Power of Suppliers Rivalry Among Existing Competitors Bargaining Bargaining Power Power of of Channels Channels Bargaining Bargaining Power Power of of Buyers Buyers (+/-) Raises bargaining power over suppliers, though it can also give suppliers access to more customers (-) Provides a channel for suppliers to reach end users, reducing the leverage of intervening companies (-) Gravitates procurement to standardized products (-) Offerings are difficult to keep proprietary (-) Migrates competition to price (-) Widens the geographic market (-) Lowers variable cost vs. fixed cost, increasing pressures for price discounting Barriers to entry (+) Eliminates powerful channels or improves bargaining power over traditional channels (-) Shifts bargaining power to end consumers (-) Reduces switching costs (-) Reduces barriers to entry (-) Internet applications are difficult to keep proprietary 22 Copyright 2001 Professor Michael E. Porter

23 The Internet and the Value Chain The Internet allows OE improvements through re-configuring discrete activities throughout the value chain in virtually every industry and company - Introducing Internet applications in one activity often requires complementary changes elsewhere in the value chain, often involving physical assets (e.g., logistics) Internet technology is particularly powerful in communicating information and in integrating and coordinating (fit) activities within the firm and with suppliers, channels, and customers Every company must have an aggressive Internet implementation program Firm Firm Infrastructure (e.g. Financing, Planning, Investor Relations) Human Resource Management (e.g. Recruiting, Training, Compensation System) Technology Development (e.g. Product Design, Testing, Process Design, Material Research, Market Research) Procurement Suppliers Channels Customers (e.g. Components, Machinery, Advertising, Services) Inbound Logistics Operations Outbound Logistics Marketing & Sales After-Sales Service However (e.g. Incoming Material Storage, Data Collection, Service) (e.g. Assembly, Componen t Fabrication, Branch Operations ) (e.g. Order Processing, Warehousin g, Report Preparation) (e.g. Sales Force, Promotion, Advertisin g, Proposal Writing, Web site) While Internet applications are important, they are neither the only nor the most important driver of cost and quality; scale, employee skills, technology, and investment in physical assets also play an important role (e.g. Installation, Customer Support, Complaint Resolution, Repair) 23 Copyright 2001 Professor Michael E. Porter

24 Selected Applications of the Internet in the Value Chain Firm Infrastructure Web-based, distributed financial and ERP systems On-line investor relations (e.g., information dissemination, broadcast, conference calls) Human Resource Management Self-service personnel and benefits administration Web-based training Internet-based sharing and dissemination of company information Electronic time and expense reporting Technology Development Collaborative product design across locations and among multiple value-system participants Knowledge directories accessible from all parts of the organization Real-time access by R&D to on-line sales and service information Procurement Internet-enabled demand planning; real-time available-to-promise/capable-to-promise and fulfillment Other linkage of purchase, inventory, and forecasting systems with suppliers Automated requisition to pay Inbound Logistics Operations Outbound Logistics Marketing & Sales After-Sales Service Real-time integrated scheduling, shipping, warehouse management and planning, and advanced planning and scheduling Dissemination of real-time inbound and in-progress Inventory data Integrated information exchange, scheduling, and decision making in in-house plants, contract assemblers, and component suppliers Real-time available-topromise and capableto-promise information available to the sales force and channels Real-time transaction of orders Automated customer-specific agreements Customer and channel access to delivery status On-line sales channel Real-time access to customer information, product catalogs On-line product configuration On-line support of customer service representatives Customer selfservice via Web sites Real-time field service access to customer data 24 Copyright 2001 Professor Michael E. Porter

25 The Evolution of Information Technology in the Value Chain Past Transaction processing Activity automation / enhancement Cross-activity integration Value chain / value system integration Future Value system optimization 25 Copyright 2001 Professor Michael E. Porter

26 Information Technology and the Value Chain Operational Effectiveness and Positioning Unique Custom Software / Mainframe Customizable / Web-Based Activity Tailoring Standard Packaged / Client Server Lower Higher Operational Effectiveness The previous generation of IT drove activity standardization and competitive convergence The Internet improves operational effectiveness while potentially reinforcing strategic differences 26 Copyright 2001 Professor Michael E. Porter

27 Information Technology and the Value Chain Tailoring and Fit Strategyspecific Fit Customizable / Web-Based Fit (Cross- Activity Integration) Generic Fit ERP None Most Packaged / Client Server Applications Standard Unique Activity Tailoring Use of the Internet enables fit in the activity system that is tailored to strategy The Internet can be a powerful strategy tool if it is used to better tailor and integrate activities around a unique positioning However, few companies are using the Internet in this way 27 Copyright 2001 Professor Michael E. Porter

28 Strategy and the Internet Core Principles Operational effectiveness advantages due to the Internet will usually be fleeting The Internet itself will rarely be a long term source of competitive advantage. It will become neutralized Traditional sources of competitive advantage will re-emerge as Internet penetration in companies rises, buyers get more sophisticated, and e-commerce becomes more established - proprietary content - unique products - unique activities or parts of activities distinct from the Internet (e.g., logistical systems) - product knowledge and personal relationships The real potential of the Internet for profitability is as a strategy enabler The Internet can contribute to competitive advantage if Internet applications are tailored to a company s unique strategy The Internet can open up new strategic positionings 28 Copyright 2001 Professor Michael E. Porter

29 Strategy and the Internet Core Principles (cont.) The Internet is often complementary to existing ways of competing Strategies that integrate the Internet and traditional advantages / ways of competing should prevail in many industries Internet technology will allow new ways of combining virtual and physical activities and creating new dimensions of value Integrated strategies, in which Internet applications become integral to the entire activity system, reinforce a company s distinctiveness and are far more difficult to imitate than stand alone applications Given the importance of integration with traditional ways of competing, separating Internet-based operations from the rest of the company often undermines the potential for competitive advantage 29 Copyright 2001 Professor Michael E. Porter

30 Strategic Imperatives for Dot-Coms Compete in industries and applications that will support a favorable industry structure Create benefits that customers are willing to pay for - E.g., AOL has continued to charge for its services despite the existence of competitors with free offers Widen value chains to encompass non-internet activities and the development of distinctive assets - E.g., many on-line retailers have already started to distribute paper catalogs in addition to posting their offering on the Internet However, do not copy established companies - Create strategies involving new, hybrid value chains - Alternatively, seek out trade-offs by concentrating on segments where Internet-only models offer real advantages and trade-offs with other methods 30 Copyright 2001 Professor Michael E. Porter

31 Recent Rationalizations of Internet True Believers The Internet creates large consumer benefits that traditional strategic frameworks fail to capture Society gains only if the value of new offerings to consumers leads to revenues that outweigh the costs of providing them Strategy frameworks are centrally concerned with the balance between revenue and cost The problems with the Internet stem from a failure to create applications that were economically viable. Such applications will emerge in the future, but will be developed based on a fundamentally different mindset The Internet is driving rapid change. Strategy will be a distraction, with rapid execution the real source of success With no strategy, a company competes on operational effectiveness which is almost always self-defeating. This includes deployment on the Internet There is no inconsistency between having a strategy and continuous improvement. All companies must incorporate the Internet into their value chains Strategy is even more critical in times of change, because it helps companies to set priorities and understand how to deploy new technologies. Indeed, strategy can allow companies to change faster and more effectively. Strategy will guide where to deploy the Internet, and how. 31 Copyright 2001 Professor Michael E. Porter

32 Recent Rationalizations of Internet True Believers (continued) The Internet is a disruptive technology rendering past strategies obsolete. This will become evident as the Internet enters its next stage The Internet is not a disruptive technology in most industries. It is usually complementary to existing ways of competing, and a powerful tool for established as well as new companies Improvements in performance due to new technologies like the Internet do not necessarily imply a fundamental change in the way of competing The Internet will create networked competition which supplants the vertically-integrated firm The Internet also lowers the cost of interaction among units within a company. The overall effect of the Internet on the appropriate level of vertical integration is ambiguous Outsourcing has major costs in terms of competitive differentiation and shifting bargaining power to suppliers which the networked model ignores Strategy concepts are independent of the level of vertical integration 32 Copyright 2001 Professor Michael E. Porter

33 Strategic Imperatives for Established Companies Deploy the Internet; but deploy it strategically Use the Internet throughout the value chain to reinforce traditional competitive advantages and complement existing ways of competing Harness the power of the Internet to enable collaboration across the value chain e.g. collaborative design; customer-led design / configuration Never deploy out-of-the box solutions in important activities, but customize applications to strategy Example: Edward Jones Brokerage firm concentrating on providing individualized advice to conservative investors like retirees and small-business owners Embraced the Internet for internal management functions, recruiting, and for providing account statements and other information to customers Plans not to offer on-line trading as its competitors because self-directed on-line trading is inconsistent with Edward Jones value proposition to customers The company is thriving and continues to outperform rivals with me-too Internet deployments 33 Copyright 2001 Professor Michael E. Porter

34 Competition in the Post-Internet Economy Old Economy New Economy Post-Internet Economy The new economy involves new technology but does not operate by different rules The old economy and the new economy will merge 34 Copyright 2001 Professor Michael E. Porter

35 Strategy What Is a Strategy? What is Not a Strategy? Appropriate goals Unique value proposition Tailored activities Activities fit together in an integrated system Clear tradeoffs Continuity of position but consistent improvement Best practice improvement A vision Learning Agility Flexibility Innovation Restructuring Mergers / Consolidation Alliances / Partnering The Internet 35 Copyright 2001 Professor Michael E. Porter

36 The general manager as strategist: Role of Leaders - Clearly distinguish operational effectiveness from strategy - Define and communicate the company s unique position - Help employees translate the strategy into their particular areas of responsibility - Guide employees in making tradeoffs that arise in their individual activities and in day-to-day decisions - Decide which industry changes and customer needs to be responded to, and how to tailor them to the strategy - Avoid organizational distractions Strategy requires constant discipline and clear communication 36 Copyright 2001 Professor Michael E. Porter