HBR's 10 Must Reads on Strategy (including featured article "What Is Strategy?" by Michael E. Porter)

by Michael E. Porter

competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products.

The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation.

Particularly when new entrants are diversifying from other markets, they can leverage existing capabilities and cash flows to shake up competition,

The threat of entry in an industry depends on the height of entry barriers that are present and on the reaction entrants can expect from incumbents.

It is the threat of entry, not whether entry actually occurs, that holds down profitability.

Customer switching costs.

Entry barriers should be assessed relative to the capabilities of potential entrants, which may be start-ups, foreign firms, or companies in related industries.

Finally, good industry analysis does not just list pluses and minuses but sees an industry in overall, systemic terms. Which forces are underpinning (or constraining) today’s profitability? How might shifts in one competitive force trigger reactions in others? Answering such questions is often the source of true strategic insights.

Producers often attempt to diminish channel clout through exclusive arrangements with particular distributors or retailers or by marketing directly to end users. Component manufacturers seek to develop power over assemblers by creating preferences for their components with downstream customers. Such is the case with bicycle parts and with sweeteners. DuPont has created enormous clout by advertising its Stainmaster brand of carpet fibers not only to the carpet manufacturers that actually buy them but also to downstream consumers. Many consumers request Stainmaster carpet even though DuPont is not a carpet manufacturer.

Competition on dimensions other than price—on product features, support services, delivery time, or brand image, for instance— is less likely to erode profitability because it improves customer value and can support higher prices.

common mistake is to assume that fast-growing industries are always attractive.

narrow focus on growth is one of the major causes of bad strategy decisions.

The best way to understand the influence of government on competition is to analyze how specific government policies affect the five competitive forces.

Identifying complements is part of the analyst’s work.

An industry’s structure can be reshaped in two ways: by redividing profitability in favor of incumbents or by expanding the overall profit pool.

improving the industry may be a leader’s most profitable strategic opportunity,

Common Pitfalls In conducting the analysis avoid the following common mistakes: • Defining the industry too broadly or too narrowly. • Making lists instead of engaging in rigorous analysis. • Paying equal attention to all of the forces rather than digging deeply into the most important ones. • Confusing effect (price sensitivity) with cause (buyer economics). • Using static analysis that ignores industry trends.

Confusing cyclical or transient changes with true structural changes. • Using the framework to declare an industry attractive or unattractive rather than using it to guide strategic choices.

COMPANIES THAT ENJOY ENDURING success have core values and a core purpose that remain fixed while their business strategies and practices endlessly adapt to a changing world.

A well-conceived vision consists of two major components: core ideology and envisioned future. (See the exhibit “Articulating a vision.”) Core ideology, the yin in our scheme, defines what we stand for and why we exist. Yin is unchanging and complements yang, the envisioned future. The envisioned future is what we aspire to become, to achieve, to create—something that will require significant change and progress to attain.

it is more important to know who you are than where you are going,

Any effective vision must embody the core ideology of the organization, which in turn consists of two distinct parts: core values, a system of guiding principles and tenets; and core purpose, the organization’s most fundamental reason for existence.

Core values are the handful of guiding principles by which a company navigates. They require no external justification. For example, Disney’s core values of imagination and wholesomeness stem from the founder’s belief that these should be nurtured for their own sake, not merely to capitalize on a business opportunity. Instead of changing its core values, a great company will change its markets—seek out different customers—in order to remain true to its core values.

Ralph S. Larsen, CEO of Johnson & Johnson, puts it this way: “The core values embodied in our credo might be a competitive advantage, but that is not why we have them. We have them because they define for us what we stand for, and we would hold them even if they became a competitive disadvantage in certain situations.”

To identify the core values of your own organization, push with relentless honesty to define what values are truly central.

A high-technology company wondered whether it should put quality on its list of core values. The CEO asked, “Suppose in ten years quality doesn’t make a hoot of difference in our markets. Suppose the only thing that matters is sheer speed and horsepower but not quality. Would we still want to put quality on our list of core values?” The members of the management team looked around at one another and finally said no. Quality stayed in the strategy of the company, and quality-improvement programs remained in place as a mechanism for stimulating progress; but quality did not make the list of core values.

gets at the deeper reasons for an organization’s existence beyond just making money. Packard said, I want to discuss why a company exists in the first place. In other words, why are we here? I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being. As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so they are able to accomplish something collectively that they could not accomplish separately—they make a contribution to society, a phrase which sounds trite but is fundamental . . . You can look around [in the general business world and] see people who are interested in money and nothing else, but the underlying drives come largely from a desire to do something else: to make a product, to give a service—generally to do something which is of value.

McKinsey & Company’s purpose is not to do management consulting but to help corporations and governments be more successful:

One powerful method for getting at purpose is the five whys. Start with the descriptive statement We make X products or We deliver X services, and then ask, Why is that important? five times. After a few whys, you’ll find that you’re getting down to the fundamental purpose of the organization.

The five whys can help companies in any industry frame their work in a more meaningful way.

An asphalt and gravel company might begin by saying, We make gravel and asphalt products. After a few whys, it could conclude that making asphalt and gravel is important because the quality of the infrastructure plays a vital role in people’s safety and experience; because driving on a pitted road is annoying and dangerous; because 747s cannot land safely on runways built with poor workmanship or inferior concrete; because buildings with substandard materials weaken with time and crumble in earthquakes. From such introspection may emerge this purpose: To make people’s lives better by improving the quality of man-made structures. With a sense of purpose very much along those lines, Granite Rock Company of Watsonville, California, won the Malcolm Baldrige National Quality Award—not

A primary role of core purpose is to guide and inspire.

The company would utterly and completely cease to exist. Would you accept the offer? Why or why not? What would be lost if the company ceased to exist? Why is it important that the company continue to exist? We’ve found this exercise to be very powerful for helping hard-nosed, financially focused executives reflect on their organization’s deeper reasons for being.

You do not create or set core ideology. You discover core ideology. You do not deduce it by looking at the external environment. You understand it by looking inside.

The authenticity, the discipline, and the consistency with which the ideology is lived—not the content of the ideology—differentiate visionary companies from the rest of the pack.

Executives often ask, How do we get people to share our core ideology? You don’t. You can’t. Instead, find people who are predisposed to share your core values and purpose;

Core competence is a strategic concept that defines your organization’s capabilities—what you are particularly good at—whereas core ideology captures what you stand for and why you exist.

Once you are clear about the core ideology, you should feel free to change absolutely anything that is not part of it. From then on, whenever someone says something should not change because “it’s part of our culture” or “we’ve always done it that way” or any such excuse, mention this simple rule: If it’s not core, it’s up for change.

For example, Henry Ford brought to life the goal of democratizing the automobile with this vivid description: “I will build a motor car for the great multitude. . . . It will be so low in price that no man making a good salary will be unable to own one and enjoy with his family the blessing of hours of pleasure in God’s great open spaces. . . . When I’m through, everybody will be able to afford one, and everyone will have one. The horse will have disappeared from our highways, the automobile will be taken for granted . . . [and we will] give a large number of men employment at good wages.”

Become the Harvard of the West (Stanford University, 1940s)

that those who hold aloft that torch of science and knowledge through these social and economic dark ages, shall take new courage and feel their hands supported.”

A successful company is one that has found a way to create value for customers—that is, a way to help customers get an important job done. By “job” we mean a fundamental problem in a given situation that needs a solution.

The most important attribute of a customer value proposition is its precision: how perfectly it nails the customer job to be done—and nothing else.

Companies will almost always need to integrate their key resources and processes in a unique way to get a job done perfectly for a set of customers. When they do, they almost always create enduring competitive advantage. Focusing first on the value proposition and the profit formula makes clear how those resources and processes need to interrelate.

Business models need to have the flexibility to change in their early years.

companies should not pursue business model reinvention unless they are confident that the opportunity is large enough to warrant the effort. And, there’s really no point in instituting a new business model unless it’s not only new to the company but in some way new or game-changing to the industry or market.

“I think historically where we [venture capitalists] fail is when we back technology. Where we succeed is when we back new business models.”

There are two ways to create blue oceans. In a few cases, companies can give rise to completely new industries, as eBay did with the online auction industry. But in most cases, a blue ocean is created from within a red ocean when a company alters the boundaries of an existing industry.