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Strategy and the New Competitive Advantage:Creating Shared ValueProfessor Michael E. PorterHarvard Business SchoolFord Canada Top 100Boston, MAMarch 7, 2012This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); CompetitiveAdvantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); and On Competition (Harvard Business Review,2008). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical,photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information may be found at the website of the Institute forStrategy and Competitiveness, www.isc.hbs.edu.

Thinking StrategicallyCOMPETINGTO BE THE BESTCOMPETINGTO BE UNIQUEThe worst error in strategy is to competewith rivals on the same dimensions20120307 Ford Canada Strategy CSV Presentation FINAL2Copyright 2012 Professor Michael E. Porter

Strategic PositioningAchieving Superior Relative PerformanceDifferentiation(Higher Price)CompetitiveAdvantageLower Cost20120307 Ford Canada Strategy CSV Presentation FINAL3Copyright 2012 Professor Michael E. Porter

Competitive Advantage and the Value ChainFirm Infrastructure(e.g., Financing, Planning, Investor Relations)Human Resource ManagementSupportActivities(e.g., Recruiting, Training, Compensation System)Technology Development(e.g., Product Design, Testing, Process Design, Material Research, Market Research)M(e.g., Components, Machinery, Advertising, Services)InboundLogistics(e.g., IncomingMaterialStorage, .g., ueaProcurementrgOutboundLogisticsMarketing& SalesAfter-SalesService(e.g., ., SalesForce,Promotion,Advertising,ProposalWriting, Website)(e.g., epair)inWhatbuyers arewilling topayPrimary Activities All competitive advantage resides in the value chain. Strategy ismanifested in how activities in the value chain are configured andlinked together20120307 Ford Canada Strategy CSV Presentation FINAL4Copyright 2012 Professor Michael E. Porter

Achieving Superior PerformanceOperational Effectiveness is Not ng Assimilating, attaining, andextending best practices Creating a unique and sustainablecompetitive positionDo the same thing better20120307 Ford Canada Strategy CSV Presentation FINALDo things differently to achievea different purpose5Copyright 2012 Professor Michael E. Porter

What Creates a Successful Strategy? A unique value proposition comparedto other organizations A distinctive value chain tailored tothe value proposition Making clear tradeoffs, and choosingwhat not to do Choices across the value chain that fittogether and reinforce each other Strategic continuity, with continualimprovement in realizing the strategy20120307 Ford Canada Strategy CSV Presentation FINAL6Copyright 2012 Professor Michael E. Porter

Strategic PositioningIKEA, SwedenValue Proposition Distinctive Activities Young, first time, or price-sensitive buyers withdesign sophisticationStylish, space efficient and compatible furniturelines and accessories at very low price points 20120307 Ford Canada Strategy CSV Presentation FINAL7Modular, ready-to-assemble, easy to ship furnituredesignsIn-house design of all productsWide range of styles which are all displayed inhuge warehouse stores with large on-siteinventoriesSelf-selection by the customerExtensive customer information in the form ofcatalogs, explanatory ticketing, do-it-yourselfvideos, and assembly instructionsIKEA designer names attached to related productsto inform coordinated purchasesSuburban locations with large parking lotsLong hours of operationOn-site, low-cost restaurantsChild care provided in the storeSelf-delivery by most customersCopyright 2012 Professor Michael E. Porter

Defining the Value PropositionWhatCustomers?Which Needs? What end users? What channels? Which products? Which features? Which services?What RelativePrice? Premium? Parity?Discount? A novel value proposition often expands the market20120307 Ford Canada Strategy CSV Presentation FINAL8Copyright 2012 Professor Michael E. Porter

Making Strategic Tradeoffs Tradeoffs occur when strategic positions are incompatibleSources of Tradeoffs– Incompatible product or service features / attributes– Differences in the value chain required to best deliver the chosen valueproposition– Inconsistencies in image or reputation across value propositions– Organizational complexity of delivering different value propositions Tradeoffs create the need for choice Tradeoffs make a strategy sustainable against imitation by established rivals An essential part of strategy is choosing what not to do20120307 Ford Canada Strategy CSV Presentation FINAL9Copyright 2012 Professor Michael E. Porter

Strategic TradeoffsIKEA, SwedenTypical Furniture RetailerIKEAProductProduct Low-priced, modular, ready-to-assemble designs Higher priced, fully assembled products No custom options Customization of fabrics, colors, finishes, andsizes Furniture design driven by cost, manufacturingsimplicity, and style Design driven by image, materials, varietiesValue ChainValue Chain Centralized, in-house design of all products Source some or all lines from outside suppliers All styles on display in huge warehouse stores Medium sized showrooms with limited portion ofavailable models on display Large on-site inventories Limited inventories / order with lead time Limited sales help, but extensive customerinformation Extensive sales assistance Long hours of operation20120307 Ford Canada Strategy CSV Presentation FINAL Traditional retail hours10Copyright 2012 Professor Michael E. Porter

The Role of Business in Society Only business can create prosperity Healthy businesses need a healthy communityBUT There is a growing awareness of major societal challenges. Concern with societalissues will be a defining characteristic of the post-crisis era Companies are increasingly perceived to be prospering at the expenseof the broader community Business increasingly is seen as a major cause of social, environmental, andeconomic problems Government and civil society often attempt to address societal issues at the expenseof business Despite growing corporate citizenship activities, the legitimacy of business has fallen20120307 Ford Canada Strategy CSV Presentation FINAL11Copyright 2012 Professor Michael E. Porter

The Role of a Company in Its CommunitiesPhilanthropy Donations to worthysocial causes20120307 Ford Canada Strategy CSV Presentation FINAL12Copyright 2012 Professor Michael E. Porter

The Role of a Company in Its CommunitiesPhilanthropy Donations to worthysocial causesCorporate SocialResponsibility(CSR) Good corporatecitizenship andcompliance withcommunity standards “Sustainability”20120307 Ford Canada Strategy CSV Presentation FINAL13Copyright 2012 Professor Michael E. Porter

The Role of a Company in Its CommunitiesPhilanthropy Donations to worthysocial causesCorporate SocialResponsibility(CSR) Good corporatecitizenship andcompliance withcommunity standardsCreating SharedValue(CSV) Integrating societalimprovement intoeconomic valuecreation itself “Sustainability”20120307 Ford Canada Strategy CSV Presentation FINAL14Copyright 2012 Professor Michael E. Porter

The Concept of Shared ValueShared Value: Corporate policies and practices thatenhance the competitiveness of the company whilesimultaneously advancing social and economic conditionsin the communities in which it sells and operates Create economic value by creating societal value– What is good for the community is good for business Use capitalism to address social problems All profit is not equal. Profit involving shared value enables society to advanceand companies to grow faster20120307 Ford Canada Strategy CSV Presentation FINAL15Copyright 2012 Professor Michael E. Porter

The Concept of Shared ValueShared Value: Corporate policies and practices thatenhance the competitiveness of the company whilesimultaneously advancing social and economic conditionsin the communities in which it sells and operates Create economic value by creating societal value– What is good for the community is good for business Use capitalism to address social problems All profit is not equal. Profit involving shared value enables society to advanceand companies to grow faster Incorporating societal issues into strategy and operations is the next majortransformation in management thinking Shared value thinking represents the next evolution of capitalism itself20120307 Ford Canada Strategy CSV Presentation FINAL16Copyright 2012 Professor Michael E. Porter

Societal Needs and Economic Value CreationEnvironmentalImpactSupplierAccess andViabilityEnergy UseWater Gender andRacial EquityWorkerSafety Social deficits create economic costExternal conditions shape internal company productivitySocial needs represent the largest market opportunitiesThere is a growing congruence between economic value creation and societal objectives20120307 Ford Canada Strategy CSV Presentation FINAL17Copyright 2012 Professor Michael E. Porter

Levels of Shared Value Reconceiving customer needs, products, and markets Redefining productivity in the value chain– How the organization conducts its business Enabling local cluster development20120307 Ford Canada Strategy CSV Presentation FINAL18Copyright 2012 Professor Michael E. Porter

Reconceiving Products and Markets Design products and services to address societal needs– E.g., environmental impact, safety, health, education, nutrition, living with disability,housing, financial security Open new markets by serving unmet needs in underserved communities– Often requires redesigned products or different distribution methods Businesses have the potential to be more effective than governments and NGOsin creating and marketing solutions to community problems New needs and new markets open up opportunities to differentiate, innovate,and grow A new generation of social entrepreneurs is capturing these opportunities, oftenfaster than mainstream businesses20120307 Ford Canada Strategy CSV Presentation FINAL19Copyright 2012 Professor Michael E. Porter

Creating Shared Value in ProductsIntuit SnapTaxSnapTax provides low-income consumers with access to tax preparationservices over the phone and enables rapid refunds 15 minutes for 15, electronic filing included Data extracted from mobile phone photos of W-2s via optical characterrecognition Debit card option for direct deposit of refunds for unbanked households Simple IRA option to enable use of refund for retirement savings20120307 Ford Canada Strategy CSV Presentation FINAL20Copyright 2012 Professor Michael E. Porter

Creating Shared Value in Products and MarketsNovo Nordisk in ChinaDiabetes training programs together with governments, NGOs, and opinion leaders topromote the latest thinking among physicians on diabetes prevention, screening,treatment, and patient communication Targeting smaller cities 220,000 sessions to date“Diabetes bus” program to raise patient awareness and provide on-site advice,NovoCare telephone hotline allows patients to reach specialists with questions.NovoCare Club provides ongoing updates to members. Patient education focuses on prevention, lifestyle changes, and effective use ofinsulin products 280,000 patients educated to date Since 1997, this program is estimated to have reduced healthcare costs in Chinaby 700 million through reducing diabetes related complications Novo Nordisk revenues have increased by an estimated 114 million20120307 Ford Canada Strategy CSV Presentation FINAL21Copyright 2012 Professor Michael E. Porter