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

by Michael E. Porter

Moreover, an improved industry structure is a public good because it benefits every firm in the industry, not just the company that initiated the improvement. Often, it is more in the interests of an industry leader than any other participant to invest for the common good because leaders will usually benefit the most.

When overall demand grows, the industry’s quality level rises, intrinsic costs are reduced, or waste is eliminated, the pie expands. The total pool of value available to competitors, suppliers, and buyers grows.

However, expanding the pie does not reduce the importance of industry structure. How the expanded pie is divided will ultimately be determined by the five forces. The most successful companies are those that expand the industry profit pool in ways that allow them to share disproportionately in the benefits.

Truly great companies understand the difference between what should never change and what should be open for change, between what is genuinely sacred and what is not. This rare ability to manage continuity and change—requiring a consciously practiced discipline—is closely linked to the ability to develop a vision. Vision provides guidance about what core to preserve and what future to stimulate progress toward.

A well-conceived vision consists of two major components: core ideology and envisioned future.

Core ideology defines the enduring character of an organization—a

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

A core ideology has two parts: 1. Core values are the handful of guiding principles by which a company navigates.

Core purpose is an organization’s most fundamental reason for being.

An envisioned future, the second component of an effective vision, has two elements: 1. Big, Hairy, Audacious Goals (BHAGs) are ambitious plans that rev up the entire organization. They typically require 10 to 30 years’ work to complete. 2. Vivid descriptions paint a picture of what it will be like to achieve the BHAGs. They make the goals vibrant, engaging—and tangible.

we found that none of the visionary companies we studied in our book had more than five: most had only three or four.

A company should not change its core values in response to market changes; rather, it should change markets, if necessary, to remain true to its core values.

Core purpose, the second part of core ideology, is the organization’s reason for being. An effective purpose reflects people’s idealistic motivations for doing the company’s work.

you might achieve a goal or complete a strategy, you cannot fulfill a purpose; it is like a guiding star on the horizon—forever pursued but never reached. Yet although purpose itself does not change, it does inspire change. The very fact that purpose can never be fully realized means that an organization can never stop stimulating change and progress.

How could we frame the purpose of this organization so that if you woke up tomorrow morning with enough money in the bank to retire, you would nevertheless keep working here? What deeper sense of purpose would motivate you to continue to dedicate your precious creative energies to this company’s efforts?

Confronted with an increasingly mobile society, cynicism about corporate life, and an expanding entrepreneurial segment of the economy, companies more than ever need to have a clear understanding of their purpose in order to make work meaningful and thereby attract, motivate, and retain outstanding people.

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.

inventing such a goal forces an executive team to be visionary, rather than just strategic or tactical. A BHAG should not be a sure bet—it will have perhaps only a 50% to 70% probability of success—but the organization must believe that it can reach the goal anyway.

When asked to name the most important decisions that have contributed to the growth and success of Hewlett-Packard, David Packard answered entirely in terms of decisions to build the strength of the organization and its people.

Many executives thrash about with mission statements and vision statements. Unfortunately, most of those statements turn out to be a muddled stew of values, goals, purposes, philosophies, beliefs, aspirations, norms, strategies, practices, and descriptions. They are usually a boring, confusing, structurally unsound stream of words that evoke the response “True, but who cares?” Even more problematic, seldom do these statements have a direct link to the fundamental dynamic of visionary companies: preserve the core and stimulate progress. That dynamic, not vision or mission statements, is the primary engine of enduring companies.

Fully 11 of the 27 companies born in the last quarter century that grew their way into the Fortune 500 in the past 10 years did so through business model innovation.

2005 survey by the Economist Intelligence Unit reported that over 50% of executives believe business model innovation will become even more important for success than product or service innovation. A 2008 IBM survey of corporate CEOs echoed these results.

Great business models can reshape industries and drive spectacular growth. Yet many companies find business-model innovation difficult. Managers don’t understand their existing model well enough to know when it needs changing—or how.

The first is to realize that success starts by not thinking about business models at all. It starts with thinking about the opportunity to satisfy a real customer who needs a job done. The second step is to construct a blueprint laying out how your company will fulfill that need at a profit. In our model, that plan has four elements. The third is to compare that model to your existing model to see how much you’d have to change it to capture the opportunity.

A business model, from our point of view, consists of four interlocking elements that, taken together, create and deliver value.

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.

Revenue model: price x volume • Cost structure: direct costs, indirect costs, economies of scale. Cost structure will be predominantly driven by the cost of the key resources required by the business model. • Margin model: given the expected volume and cost structure, the contribution needed from each transaction to achieve desired profits. • Resource velocity: how fast we need to turn over inventory, fixed assets, and other assets—and, overall, how well we need to utilize resources—to support our expected volume and achieve our anticipated profits.

We’ve found it most useful to start by setting the price required to deliver the CVP and then work backwards from there to determine what the variable costs and gross margins must be. This then determines what the scale and resource velocity needs to be to achieve the desired profits.

The customer value proposition and the profit formula define value for the customer and the company, respectively; key resources and key processes describe how that value will be delivered to both the customer and the company.

One way to generate a precise customer value proposition is to think about the four most common barriers keeping people from getting particular jobs done: insufficient wealth, access, skill, or time.

Having articulated the value proposition for both the customer and the business, companies must then consider the key resources and processes needed to deliver that value.

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.

Rules, norms, and metrics are often the last element to emerge in a developing business model. They may not be fully envisioned until the new product or service has been road tested. Nor should they be. Business models need to have the flexibility to change in their early years.

“When significant changes are needed to all four elements of your existing model.”

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. To do otherwise would be a waste of time and money.

YOU DON’T ALWAYS NEED a new business model to capitalize on a game-changing opportunity. Sometimes, as P&G did with its Swiffer, a company finds that its current model is revolutionary in a new market.

While a well-considered business-model-innovation process can often shorten this cycle, successful incumbents must tolerate initial failure and grasp the need for course correction. In effect, companies have to focus on learning and adjusting as much as on executing. We recommend companies with new business models be patient for growth (to allow the market opportunity to unfold) but impatient for profit (as an early validation that the model works).

truly transformative businesses are never exclusively about the discovery and commercialization of a great technology. Their success comes from enveloping the new technology in an appropriate, powerful business model.

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

Red oceans represent all the industries in existence today—the known market space. In red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are well understood. Here, companies try to outperform their rivals in order to grab a greater share of existing demand. As the space gets more and more crowded, prospects for profits and growth are reduced. Products turn into commodities, and increasing competition turns the water bloody.

Blue oceans denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid.

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 wh...

It’s not about technology innovation. Blue oceans seldom result from technological innovation. Often, the underlying technology already exists—and blue ocean creators link it to what buyers value.

Looking forward, it seems clear to us that blue oceans will remain the engine of growth. Prospects in most established market spaces—red oceans—are shrinking steadily. Technological advances have substantially improved industrial productivity, permitting suppliers to produce an unprecedented array of products and services.

in more and more industries, supply is overtaking demand.

According to recent studies, major American brands in a variety of product and service categories have become more and more alike. And as brands become more similar, people increasingly base purchase choices on price.

In overcrowded industries, differentiating brands becomes harder both in economic upturns and in downturns.

by focusing on competition, scholars, companies, and consultants have ignored two very important—and, we would argue, far more lucrative—aspects of strategy: One is to find and develop markets where there is little or no competition—blue oceans—and the other is to exploit and protect blue oceans.

the blue oceans made by incumbents were usually within their core businesses. In fact, as the exhibit shows, most blue oceans are created from within, not beyond, red oceans of existing industries. This challenges the view that new markets are in distant waters. Blue oceans are right next to you in every industry.

There is no consistently excellent company; the same company can be brilliant at one time and wrongheaded at another. Every company rises and falls over time.