The first part of our blog post series summarizing Michael E. Porter’s talk at the ZfU International Business School, Switzerland, focused on what Porter believes is most crucial in making a strategy successful. In the second part, we would like to share with you his comments on how to think strategically.
Strategy means creating and sustaining a competitive advantage. That was the main massage of Porter’s talk. Thinking strategically, therefore, requires first of all to continuously seek ways not how to be better but how to be different from the competitors. The worst mistake one could make, he said, is to compete with the rivals on the same level.
He continued to explain that “strategic thinking starts with setting proper financial goals.” The overall goal of any business should be “superior long-term return on investment.” He argued that being big without achieving and sustaining superior ROIC doesn’t get business anywhere. Instead of trying to please the interests of their shareholders, businesses should focus on creating “real economic value.” If the ROIC is high, shareholder value will increase by itself.
For large multi-branch businesses, Porter distinguished between two levels of strategy: business-unit strategy and corporate strategy.
Business-unit strategy concentrates on how to compete best within a particular industry. It looks both at the industry structure (How attractive is the industry - today and in the future?) and the strategic position (Do we have a sustainable competitive advantage over our rivals?). Strategic thinking, Porter said, must encompass both areas. A popular tool for analyzing the competitive environment is Porter’s classical 5 Forces model.
Fig. 1: Five Forces
An approach for reshaping the industry is the so-called “Positive Sum Competition” approach, that is by competing on differentiation rather than price. This type of competition allows for more than one company to be successful and “expands the customers served, the need that are met, and the overall value pool.” The value chain provides businesses with a variety of choices how to deliver value to the customer and set themselves apart from the competition.
Copyright 2013 © Professor Michael E. Porter
Fig. 2.: The value chain allows for a wide range of strategic differniation
Corporate-level strategy addresses the entire strategic scope of the enterprise. It is the “big picture” view of the organization and should be the responsibility of the CEO and leadership team. Corporate planning and development staff should play a supporting role here.
However, Porter stressed that clear strategic thinking is essential for managers at all levels of an organization!