On June 2013, Horváth Strategy Network organized a trip for its members to the renowned ZfU International Business School, Switzerland, where Harvard Professor Michael E. Porter was invited to talk about two of his favorite topics: strategy and competition. We were among the lucky ones to be there and would like to share what we learned with our readers in a series of blog posts.
One focus of Porter’s talks was on one of the fundamental questions of strategic planning: What makes a strategy successful? He answered this question by outlining five key characteristics of a successful strategy:
- “A unique value proposition compared to competitors” - While this may sound trivial, it really isn’t. Many businesses simply try to be better than their competition, which typically results in products and services that are similar in nature. In consequence, differentiation strategies tend to be built on price alone. What really counts is to be different!
- “A distinctive value chain embodying choices about how the organization will operate differently to deliver on its value proposition“ – To illustrate this point, he mentioned Nespresso as a good example: Nespresso's strategy is to offer uniquely high quality, easy-to-prepare single-serve espresso coffee at a premium price. It appeals to a consumers that want to feel good and special about themselves and intentionally discriminates convenience-sensitive consumers. Nespresso sets itself apart from other coffee brands along the entire value chain: From the large variety of available flavors to the use of individual proportioned capsules which are tailored to espresso machines manufactured by high-end machine vendors to the choice of sales channels: Capsules are sold only online or through exclusive boutique shops in major cities. Focused image-oriented media advertising completes the harmonious concept.
- “Making clear tradeoffs, and choosing what not to do“ – Trade-offs occur when activities are incompatible because more of one thing necessitates less of another thing. Tradeoffs create the need to make a choice and are necessary to make a strategy sustainable against imitation by established rivals. IKEA provides a good examples of how making a clear choice and sticking with it can lead to success. For more than 60 years, the Swedish company serves customers who are happy to trade off service for cost. While they get furniture at a low price, they cannot customize designs, need to find the items they want to purchase themselves in large on-site warehouses, and need to assemble the furniture themselves.
- “Activity choices across the value chain that fit together and reinforce each other“ – Porter argues that competitive advantage and sustainability does not grow out of a single activity, rather it is the result of an entire system of activities. All activities along the value chain need to be consistent and reinforce each other to lead to optimal outcomes. “Fit is leveraging what is different to be more different,” he says.
- “Continuity of strategic direction” – Strategic continuity is essential to creating and sustaining competitive advantage. Important prerequisites for achieving continuity are the understanding of the strategy throughout the organization, the development of truly unique skills and assets related to the strategy, and the establishing of a clear identity with customers and other stakeholders. „Reinvention and frequent shifts in direction are costly and confuse the customer, the industry, and the organization,“ Porter is convinced. Instead, he advises businesses to “maintain continuity in the value proposition, but continuously improve how to realize it.”