Michael E Porter Comp. Strategy Flashcards
Michael Porter Parter 1
what is comp. strategy: it’s positioning of a company in its competitive environment involving all its functions beyond product or marketing positioning.
How to develop a strategy? we must understand 2 vital questions:
- structure of the industry the company is competing. this answer the average profitability of the industry.
- company competing within its industry. it answers the question how a company can have superior profitability than the average of its industry.
Industry analysis:
- rivalry among existing competitors: some are cutting throat while some are more gentle
- Threat of new entrants (barriers to entry):
- threats of substitutes:
- bargaining power of suppliers: labor, material, machinery
- bargaining power of buyers: they might be price sensitive
- intensity of rivalry analysis: industry growth, product differences, brand identity, switching costs, barriers to exit, diversity of competitors
The analysis about government’s regulation in industrial analysis should consider how government’s regulation/deregulation impacts on these forces.
Industry’s structure is not static since the new technologies and new products can enter the marketplace and shift the dynamics, so analysis of mega trends of this industry is also important to evolve competitive strategy of a company in a sensible way.
take pharmaceutical industry for example: 3 things undermine the high profitability of the industry. 1) Buyers: there are increasing pressures of cost controls coming from government or insurance companies. 2) emergence of generic drugs. they don’t have the brand of manufacturers but they are chemical equivalent of branded drugs at a much lower price. 3) emergence of biotechnology. it reduces the cost of developing new drugs and lowering the barriers to entry. biotech companies start to enter this industry. with these trends, unless the drug companies can react and overcome the impact, the profitability of pharmaceutical industry are likely to go down.
some industry are facing positive changes: taking airline industry in 1980s for example: 1) new management system improved the efficiency of this industry. 2) frequent travel programs rolled out
In industrial analysis, we also need to watch out that a company can potential change the industry to change their destiny but can also destroy it, especially as a leading company industry, it should proactively make the industry structure better.
2 types of Competitive advantages: low cost, differentiation.
2 types of competitive scope: broad (choose a wide range of customers, products and geographic areas to compete) or narrow.
therefore, 2 by 2 analysis: Broad&Cost, Broad&differentiation, Focus&Cost, Focus&differentiation
Cost leadership 1: companies manage the drivers of their cost so well to create a big cost gap to their competitors. in gaining this cost advantages, they can achieve good profitability.
Cost leadership 2: example of La Quinta hotel chain
La Quinta focuses on serving customers like traveling sales/executives. their strategy include
1. choosing convenient locations: near highway, intersection, industrial park, business complex where business people go around. they are always near 24/7 restaurants.
2. rooms: spatial, sound proofing,
3. other services: 24/7 message services etc. at business centers.
4. good price
5. consistency of room up
6. no room service
how can they deliver all these services in such a low cost? they avoid unnecessary services (room services) and waste of space and keep the maintenance cost of each room low. they also have corporate culture of cost control fettish - their construction cost is managed carefully and stay at low, so does purchase cost and other cost items.
La quinta hotels are also operated by a couple, to whom a nice house is provided by corporation. this creates a friendly and family-like environment for their guests. the couple also has a strong loyalty to the corporation.
the corporation also provides trainings of repairing of key things. this reduces cost and provides a timely service to customers.
La Quinta also constantly surveys their customers to understand customers’ preferences.
Lessons from La Quinta which has a focus strategy:
- choose target segment with distinct needs
- serve target exclusively
- don’t broaden strategy to lose its competitive strategy
Lessons from its low-cost strategy
- find segment with lower needs
- invest where needed (i.e. invest on technology to make bookkeeping more efficient; invest on construction and innovation to make room comfortable and quiet)
- make cost part of the company culture
Emerson electric’s cost leadership strategy:
- define the right quality level (creating a good product but willing to let go certain functions or features)
- know the competitors’ cost
- set the tone for productivity
- formalize cost reduction on continuous basis by integrating it as a financial target planning
- communication related to cost reduction (cost reduction is part of mgmt system. each worker online can literally associate their work to certain cost reduction plan)
- commitment of capital to make low-cost happen
Lessons from Emerson electric:
- create a good product
- draw cost advantages from many sources
- study the competition to understand where Eermson stands since cost advantage is all relative. it’s a good mobilizing tool to drive the organization towards ever lower cost
- make cost a part of a company culture
- Differentiation strategy starts by identifying a number of needs that buyers think are valuable and very important. differentiators manage to stand out by achieving to meet these needs, in other words, creating values for the buyer, including spend a little more necessary cost to get superior performance in order to charge premium price.
- differentiators also communicate the differentiation to make sure the customers know about it. the communication has to be clear, creditable and believable.
- differentiator also set up measurement to track and monitor progress
- differentiators worry about cost too as low-cost players but they are more conscious where to put extra cost to generate higher value for the buyer who are willing to pay at a premium price for the extra value
- differentiators have to be moving targets since competitors are constantly trying to emulate these differentiations
American Airline focus on these differentiations back in 1980s:
1. services
2. on time departure
3. its Sabre system, the first computerized reservation systems, allows its travel agents (they contribute 80% AA revenues) to issue the tickets on that terminals
4. it invented frequent flyer program
5. its communication of differentiation strategy: advertising, pay particular attention to target customers,
6. Super-saver-fare pricing strategy: AA provides deeply discounted economy fare tickets for empty seats. They are usually non-refundable and can not be changed without a change fee. The airline only makes a limited number of seats available at these prices.
7. it also used two-tier salary scheme to manage labor cost by offering a lower salary rate for new employees to reflect market condition
Although in 2007, AA filed bankruptcy. but for decades this company has been one of the most innovative leaders in its industry and it’s not touchable.
compared with AA, which has a broad differentiation strategy, Cray research, a producer of super computer, has a narrowed differentiation strategy.
- it provides both super computers’ hardware as well as proprietary software which allows the most common programming languages. it also encourage users and software developer to develop new software that can be used on cray hardware
- it has well trained, highly professional and sophisticated sales frontline who can talk with world-class scientists as well as CEOs
- it takes Cray to build a super computer in 9-month with all hand-craft engineering
- it has permanent on-site engineer and complementary parts at customers’ sites
- its sophisticated workbook to communicate the high quality and trustworthiness
- there are constant dialogues between functions of customers and cray’s. Cray discloses its plan openly with customers and encourage customers to go to their backroom to provide transparency.
Lesson from Cray research:
- create value that justified premium
- the differentiation is more than physical products
- communicate differentiation, user referrals,
- be a moving target by constantly improving its product and services
- it builds its strategy around targeting on one particular segment - super computer
- find segment with greater needs, instead of lower needs
- there is a risk on focus strategy since they make all the bets on one segment
- focusers constantly face challenges of expanding scope of products/services in front of temptations
Positioning:
- don’t ignore industry structure
- choose a different strategy
- don’t dare to make trade offs
Developing a strategy in practice: translating strategy into organizational actions, it takes explicit skills.
Measuring and assessing strategic health of an organization on top of financial health is important. i.e. assessing what the customer needs, how is the health of a distribution channel, how is the economics of competitors.
Strategy development process:
- create a formal process
- use a multi-functional team: create holistic thinking and know where to trade off. know the feasibility of strategy implementation.
- communicate the strategy: inside the organization and outside in the marketplace.
- be consistent over the time
- user proper measurement: find underlying measures
- probe and test strategy continually
Most companies want to be the best company in that industry. this is fundamentally wrong, since a company cannot serve everyone in the marketplace. it has to choose which particular segment(s) to serve and how to make trader off to provide value to these segments of customers. In short, a company has to think about how to make self unique.
Strategy is a whole set of long-term choices that distinguish ourselves from competitors. strategy takes a long time to put in place and implement. if you are doing exactly the same thing as your competitors, that’s not strategy, its’ operational excellence - you just do slightly better than your competitors. it’s around choices, the choices that you make and the choices that your competitors make. wanting to grow faster is not a strategy, it’s a goal, it’s an aspiration. it’s not one thing one step. going international is not a strategy. strategy is holistic. it’s whole set of steps. it involves all the functions together to create the unique position. it’s not vague. it’s not mission statement. it’s very specific.
Stock price is not a strategy, it’s a result. economic performance creates value. we should focus on improving long-term sustained economic performance since it creates shareholder value, not another way around. many public companies are confused about the scorecard. the market can be way off when the stock price looks fine. we shouldn’t please the wall street analysts.
strategy occurs at multiple levels in any company. the core level is business strategy is about how to compete in each or in the distinct business in which you operate . another level strategy is cooperate strategy is about overall strategy in a diversified group.
often the health of your industry is just as important as how good a position you have.
