Michael E Porter on Thinking Strategically
Thinking Strategically for value creation
Strategy is one of the most important aspects of business. Successful businesses start from a successful strategy. However, strategy can be complex and unless the managers have a proper understanding of strategy and strategic factors, their strategies can fail. Michael E Porter provides some enlightening knowledge on the remarkable difference that comes from thinking strategically. Thinking strategically does not mean striving or competing to be the best. However, competing to be unique is a good strategy. Competing with the rivals along the same dimensions can be a poor strategy. Strategy is not as simple and straightforward as it appears which is why not all strategies win. Most or many of them can fail. Porter speaks about what really strategy is in the video and why firms and mangers must have a clear understanding of strategy to be able to generate unique value.
Strategy does not simply mean aspiring to be something big or the number one or even planning to grow and provide better returns to the stakeholders. Aspiring to be the world leader is not a strategy. Strategy answers much bigger questions than that. It is not simple one or two actions either. Mergers or internationalization or even outsourcing simply are not strategy which is something even bigger. It is not the same as vision or mission either because they too are just small fragments of strategy. A sentence like "Our strategy is to meet the financial needs and aspirations of our customers" is not strategy. Strategy is a distinctive approach. It is a firm's distinctive approach to competing in the market and the competitive advantages on which the approach is based. The foundation of competition lies in economic factors. There are two distinct causes from which company economic performance results. They are industry structure and strategic positioning within the industry. Strategic thinking should be related to both the areas. Companies must not focus on just their own position but on the health of the industry. Apart from sustainable competitive advantage the companies must focus on the attractiveness of the industry. Porter also lays emphasis upon the five factors that shape industry competition and profitability. These five factors are:
- Threat of substitute products or services
- Bargaining power of suppliers
- Bargaining power of buyers
- threat of new entrants
- Rivalry among the existing competitors
These five factors also define the industry structure and part of the strategy is to define a positive transformation in the industry structure. There is a need for a competitive advantage to achieve superior performance within an industry which can be gained by differentiation. Porter shows that all the value resides inside the value chain. Value chain is a set of activities that deliver value to the customers. All the competitive advantage is rested in the value chain and how the activities in the value chain are linked and configured represents the strategy. The difference lies in how the companies choose to configure their value chain. In the same industry there can be several distinct ways of configuring the value chain. Operational effectiveness too is not strategy. Operational effectiveness lies in assimilation, attainment and extension of best practices. It is in doing things better - in validating and executing. However, strategic positioning is something different. It is about creating a unique value proposition. It is about doing things different for providing superior customer value.
What creates a successful business strategy?
A successful strategy means creating a unique value proposition compared to others. Defining the value proposition is an important step in strategy. Defining the customer segment, their needs, and then a pricing strategy all is important. First a firm must know who its consumers are, what are the channels to reach them? Which needs are to be addressed? what product features or services are to be brought to the customers? Next is the pricing strategy. How will a firm price its products relative to its competitors? Will it be premium pricing, parity or discounted pricing? A successful strategy has a unique value proposition as compared to the others. It is also based on a distinctive value chain that embodies choices over how the brand will operate differently to deliver its uniqueness. A successful strategy also depends on making clear trade-offs and choosing what not to do. Porter cites the example of IKEA to explain the concept of strategic positioning.
IKEA's value Proposition
IKEA provides a wide array of stylish and space efficient furniture and accessory lines that have compatible designs but very low prices. IKEA's customers seek quality and sophisticated designs but at very ow prices.
IKEA's Distinctive Positioning Activities
- IKEA provides modular, ready to assemble furniture designs that are also easy to ship.
- All of its products are designed in house.
- IKEA provides a large range of styles that are displayed in its huge warehouses.
- the customers can self select the models.
- IKEA focuses extensively on customer information through catalogs, do it yourself videos, and assembly instructions.
- So that the customers can make coordinated purchases the IKEA designer names are attached to the related products.
- For its stores IKEA has selected subordinate locations having large parking areas.
- The brand stores operate for long hours.
- There are on site low cost restaurants available on site.
- In-store child care
- Facility of self delivery for customers.
Michael E Porter has offered insightful advice on strategy and how it can influence business. The deep relationship is explained lucidly in his words. Porter further offers explanation on how .to make strategic trade offs to create a great business strategy. Porter clarifies it in his words by explaining the difference between the strategy of IKEA and that of an ordinary furniture retailer.
IKEA Products versus ordinary products :
IKEA products are low priced. It offers ready to assemble modular designs. There are no custom options. The furniture designs are based on low costs, simplicity and elegant style. The value chain of IKEA is centralized where all the products are designed in house. While sales help at IKEA may be limited, customer information is extensive. The typical furniture retailers price their products high and sell fully assembled products.
The fabrics, colors, finishes and sizes of furniture are customized. Designs of ordinary furniture brands are driven by materials, image and varieties. The ordinary brands source some or all of their product lines from the outside suppliers. Their showrooms are mostly medium sized and they display limited models in these showrooms. they keep limited inventory and provide extensive sales assistance. Their hours of operation are limited and they follow the traditional routine.
IKEA has made strategic tradeoffs that has helped it create a better business model than its ordinary competitors. These tradeoffs have helped it create better business value which has transformed to higher loyalty and better sales. Porter's videos are full of insightful advice on strategy and can be of immense help for business managers and students alike. he offers advice that can help you feel and fill the gaps in strategy and make better choices in day to day business.