Strategy – Prof. Michael Porter (Harvard Business School)

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Let’s talk about Strategy I want everybody in this room to think about your company and as we’re talking, this is not a theory, this is about how to think about your own business and how you’re developing how you’re thinking about it the choices you’re making. What choices you’re making and so let’s use this as a working session and then over the course of the day we’re going to hear from a number of other companies that are doing really interesting work and hopefully we’ll cumulatively as a result of all of this.

I think we’ll all enrich our understanding of this very very fundamental topic Strategy Now What do we what have we kind of learned about how to think about strategy. Well, I think what we learned is that the instinct that most leaders have about success and and most people actually have about success is dangerous is is potentially distracting What I find is that when when you ask a company what success looks like The answer that you get, I get a lot is well, I want to be the best company in my industry I want to be the best Bank, I want to be the best Auto company.

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I want to be the best Consumer packaged goods company in this category. I want to be the best that’s success if I can be the best company in my industry I will succeed and that is a very natural human way to think. We all hope to be the best at what we do, but in business competition and what we’ve come to understand is that’s actually not the way to think about success. The reason is that there is no best company. So it’s pretty dangerous to try to do something that’s impossible. There is no best Auto company, there is no best Insurance company, it all depends.

It all depends there is no best, there’s no one way to compete The biggest mistake in strategy is to think that there’s only one way to compete, in every industry there are different ways to compete depending on … What customer and customer needs you’re actually trying to meet? So when you ask them the question what’s the best car or the best car company You can’t answer that because being the best all depends on Who you’re trying to serve?

If you’re trying to serve young families being the best is different and if you’re trying to serve people like me.

Serving people that want, you know luxury and performance, to be the best at that is very different than providing a very very low cost efficient, you know electric vehicle There is no best way to compete. There are lots of good ways to compete depending on who you’re trying to serve. So the number one principle strategy is don’t think this way Instead what you want to think about is how can I in my company be unique? How can I create unique value for the set of customers I choose to serve Strategy is fundamentally about choice It’s making a set of choices and the most fundamental choice is Who am I trying to serve and One of the worst mistakes in strategy is to try to serve everybody You can’t meet the need of every customer you just can’t do it it’s impossible I’ve seen hundreds of companies try it’s impossible.

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You can’t meet all the needs of every customer Fundamentally, if you have a strategy you’ve got to decide which needs of which customers You’re actually going to seek to me that you might be able to do if you’re clear about where you’re heading Another tremendous mistake in strategy is to get into a competition with your competitors on the same thing If your competitor is trying to be in the lowest cost it’s pretty Unusual to win if you then try to chase them and be low-cost The essence of strategy is to find a unique position in your business that delivers unique value to the customers you choose to serve.

Sounds simple but most companies don’t do it. Most companies are confused they lack clarity on what strategy is and they and in many companies the there is a fundamental inability to make choices. Which ultimately lead to lack of success. Now again in a country like India where growth has been relatively rapid you can ride you can ride the rising tide and do okay But I’m talking today about the companies are gonna be truly successful truly successful not the ones that are just bumping along with the market To be truly successful, we really need a strategy and that strategy isn’t about just being the best Now, you know the word strategy gets used a lot and and I always try to help companies I work with and people I work with kind of have a clear understanding what we mean by a strategy.

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Here it is Strategy is a set of choices we make Long-term choices to distinguish ourselves from competitors. That’s what it’s all about. It defines how we’re going to compete differently and It also really articulates the competitive advantages that we will seek to create and use in order to win Okay, so at a very high-level, this is how I would define strategy Again note the word long-term Strategies about long term it’s not about tomorrow and the next day It’s about the long term because strategy takes a long time to put in place and implement Strategies about distinguishing yourself being different If you’re doing the same thing as your competitor,

you don’t have a strategy You’re just trying to do the same thing better That’s what we call operational excellence.We’ll talk about that in a minute Strategy is around choices what choices you make versus the choices that your competitors are making Strategy then is different than just we want to be number 1 or number 2. That’s not a strategy Wanting to grow faster is not a strategy Those are goals, those are aspirations the strategy is the unique position that allows you to get to whatever goal you set We can’t confuse the strategy and the goal We can’t mix them up.

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We have to separate the goal we’re trying to achieve and then the strategy is how we’re gonna get there Strategy is not just one thing one step, strategy is not to go international. That’s not a strategy You know raising R&D is not a strategy. Strategy is holistic It’s the whole set of choices that you make collectively in order to position the company for success over time in the marketplace It’s not just it’s not one-step it’s a set of steps Strategy involves all the functions. It includes marketing production finance everything together to create that unique positioning that’s what strategy is all about and strategy isn’t vague It’s not a mission statement It’s very specific as we’ll see So here’s where we start with a sort of we we all have to get grounded in in a clear idea of what we actually mean by a strategy and Once we start there, then we can start making doing the analysis and making

the choices necessary to get there now many of you are are public companies and here we have an additional issue that a lot of companies get confused about and that is if you’re a public company, we have a stock price and we you know, everybody looks into stock price and What we what we also have to understand if we’re going to set a good strategy is actually the stock price is not the goal The stock price is a result The goal is superior economic performance strategies about creating superior economic performance in terms of return on capital and in terms of growth Not one year but on a sustained basis Okay, and what we know is that it’s economic performance that really creates value Price can go up or down depending on what happens in the world That doesn’t mean that value changed The value is actually created by the economic performance

The ability to be profitable and earn a good return on capital and grow that business Well, we’ve got to remember is when we set strategy we have to focus on the economic performance part We can’t try to please the stock market We can’t try to figure out what today investors want that’s gonna confuse us It’s going to pull us away from where we want to go So I think you know critical for a for strategy particularly in public companies is the idea that actually performance Determines shareholder value not the other way around You’d be surprised this sounds awfully simple, it’s not I work with hundreds of public company CEOs and they get all confused about well, who? what’s what’s the scorecard here? And and the stock market is is sort of a long-term works pretty well as a scorecard if you have good economic performance eventually your stock price goes up But in the short term

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stock price is a lousy way of judging success The markets can be way off That’s what we find in the studies on this question So we’re this is all about long-term sustained economic performance and we should have the courage to let the stock price take care of itself and Not try to get crazy trying to please the analysts or Deal with whatever criticism we’re getting, you know in the stock market Now when we think about strategy again another key principle and then we’re gonna dig in a little bit is Strategy occurs at multiple levels in any company in many companies not every company The core level strategy is what we call business strategy That’s how to compete in each or in the distinct business in which you operate So here if you’re in passenger cars, you’d have a strategy for passenger cars That’s business strategy, but there’s in many companies.

There’s another level of strategy which is what we call corporate strategy and That has to do with the overall strategy of the diversified or multi business company We got a lot of conglomerates. I don’t like the word conglomerate Conglomerate is not a strategy We’ve got a lot of companies though that are more than one business We got to have a strategy for each one of the businesses Because that’s in a different market competing in a different way to serve different customers but we also need to think about the overall strategy of the diversified group and that is a very different animal and There’s a new there’s this new set of principles or a different set of principle for thinking about that Again I Find a lot of confusion a lot of companies mix these up together Corporate and business get mixed up.

That’s a mistake We’ve got to keep these levels separately and we’ll talk about these briefly as we have time now let’s talk about business unit strategy and not go quite quickly because Again, I’m hopeful that most of you are pretty well grounded in the key ideas here so what we understand is in it can in a business a particular business The drivers of success and the key elements of strategy have to do with the industry itself the business itself and the position we choose to occupy in that business Strategy is both together. Ok What we what we understand is that industries are different in terms of the nature of competition And we got to understand our industry.

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We got understand how its Competition is evolving Where it’s heading? And what kind of competitive dynamics are we gonna have to contend with? We’ve got to understand that business by business and then of course we have to make those choices about where we’re going to compete But one of the things I I find over and over again is Often the health of your industry is just as important as how good a position you have If you’re in a industry that’s in trouble that’s failing You may have a great position but that’s not very valuable so so we got to learn to worry about our industry, too We have to help our industry thrive not just focus only on our own position again These are things that we’ve learned from many many many examples.

In terms of industry analysis hopefully everybody finds this familiar You know we after you know 20 or 25 years of work we have overwhelming evidence that really industry competition is driven by these competitive forces That we introduced many years ago now Those competitive forces collectively drive The fundamental attractiveness of the industry, the average profitability in the industry Yeah, yeah, here’s a simple example in the heavy truck industry and in our country very difficult industry if you look at this industry you see a lot of Competitive forces that are challenging We have a lot of vicious vicious competition on price Among the truck manufacturers

We have some high regulatory standards which are pushing up their cost To meet those standards, but it’s very hard to pass those cost on to the customer because the customer is consolidating Into large or larger fleets and leasing companies that have a lot of bargaining power in order to push down the price So the combination of rising regulatory costs and a powerful customer is squeezing the truck manufacturers We see that to make heavy trucks you make some of the parts in-house some companies make more some companies make less but you’re so having to source things like engines and Drivetrain components axles and things like that and many of the suppliers of those Components that you’re buying have very strong brands and in fact the trucking company Specifies the brand of the parts that they want on the truck Now they want a Cummins engine.

For example So you’re so you’re buying from suppliers who have a lot of clout Because they have their own relationship with the end customer So that squeezes the truck companies the truck manufacturers in the middle This is in in in in North America Primarily but the same basic structure exists in many other parts of the world It actually isn’t that hard to enter in the industry And the threat of entry and entry barriers are a key part of industry analysis And you know it’s actually harder to get the dealer network than it is to actually get the parts and assemble the truck And then of course trucks are always competing with substitute substitutes Yet all of us hopefully understand what a substitute is a substitute is a different way of meeting the need That’s not this is the same as your product but meets the same need that your product does So if you’re trucking if you’re a truck manufacturer You know,

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the customer doesn’t need a truck if they’re going to use the railroad or if they’re going to use water transportation, so particularly You know as railroads railroads have been a real tough competitor for trucks Over the years. Okay, so This is a classic example of industry analysis. It’s something that is timeless Always every single time you think about strategy you have to have a systematic rigorous Understanding of your industry and what are the competitive drivers? And how are they changing are they getting worse than getting better where where’s the new competitive force coming from That you’re gonna have to deal with if you’re gonna if you’re gonna win in that particular industry You know, here’s another example of an industry industrial gases The this industry makes oxygen hydrogen argon,

all these industrial gases that are increasingly used in production processes in all kinds of other industries and What your first look at this industry says, oh my god do I really this is a pretty tough industry Because I’m selling industrial gases that are commodities Hydrogen is hydrogen How can I ever make money just selling a commodity gas? Particularly when I’m selling to a lot of customers who often have bargaining power they’re big manufacturing companies Industrial gases are made with feedstocks like, you know petrochemicals and I have no control over the price of the feedstock So if the feed stock price goes up, I’m in trouble if I’m selling a commodity gas Again not so good element of the industry You know, it’s not not that hard to get in I mean lots of people can figure out use the figure out how to make helium or hydrogen and Have a little facility in the in the in the factory And many of the customers decide.

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Well, this is not something I want to buy. I want to make my own industrial gases in-house and Make them right right in my factory right on the production line. Ok. So again, here’s an industry your first look says Not so good. I don’t want to play here. That’s your first instinct but again what we learn about industry analysis is we’ve got to we’ve got to be sophisticated We can’t just take the superficial look at the industry, we’ve got to dig down a little bit and if we dig down in this industry, what we’ve learned is actually it’s quite an exciting and interesting industries in fact the companies in this industry have done very well and the reason is that the superficial look doesn’t really get at the true industry structure so just an example is the Probably the most interesting thing about the industry is that the cost of transportation are very high? To move gas from your plant to your customer takes a big truck It’s very expensive to ship It’s got to be shipped under pressure And you have to kind of have a big tanker truck and it has to go to the customer side and it has to unload the gas through you know pumping it into the tank there and Transport cost Means that in order to be efficient in this industry, you have to have density of customers so if you have you have only one customer in Mumbai and you have to drive all the way to Mumbai for one customer and spend all that money to drive that truck full of helium here and you get to Offload a little bit for one customer.

Your costs are going to be very high but if you come to Mumbai and you have 17 customers and your trucks from one to the next to the next and they’re all close by Then actually that makes your business super efficient Compared to the guy who’s only going to deliver to one or two customers Transportation costs take a very superficially lousy industry and make it into a very attractive industry Because all of a sudden If you have a dense group of customers in a given market, it’s almost impossible for your competitor to attack you It’s just too expensive. They’ll never they’ll never be able to afford to win those customers and it creates a lot of Because you’ve got to build a customer base over a long period of time and this is a very critical product for the manufacturing process so you don’t want to try some newcomer and not be sure that they’ll show up if they don’t show up with your helium, you’re in trouble in your plant Okay. So again, I won’t go through the details But what I’m trying to get across here is that we all have to be really sophisticated at industry analysis in our businesses We got a look below the surface.

We can’t we can’t just say oh, this is a commodity. It’s allows the industry. Uh-uh It’s a commodity. It’s quite an attractive industry dig down understand the real entry barriers Understand that the the real bargaining power of the customer and the supplier And and and the people that could see this have built tremendous businesses in industry that nobody else wanted to go into for the stock market thought this was a crummy industry for a long time boy, were they wrong The investors that could understand how attractive this business was boy, did they do well again You know what? What we find in in competition is the that actually the concepts themselves are not that complicated but actually applying them well is really hard and That applies both to the companies but also to the investors that are trying to figure out whether a company is successful or will be successful How do we achieve superior profitability in the industry Whatever the industry attractiveness looks like well that has to do with with the two fundamental types of competitive damage And and this never changes and never will change there’s only two ways to get in advance one is to differentiate yourself Do something better? Customer will pay you more for it Because you’re delivering some something the customer thinks is better It could be designed it could be image it could be functionality, it could be service.

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It could be almost anything But you know competitive advantage number one is differentiating and getting a higher price and If you’re differentiating you better get a higher price Because if you’re not getting a higher price, then you have to ask, are we really differentiating if nobody’s willing to pay us extra? are we really better and That’s a kind of a tough honest question we have to ask ourselves. The other kind of competitive advantage is lower cost If we can actually do something cheaper and more efficiently and and that’s not just luck that’s not just oh we bought a lower cost parts this week But if we can find a way of structurally being lower cost because we’ve redesigned the way we do things That’s the other kind of competitive advantage And really the broadest thinking about strategy starts with okay which path are we on? Are we we on the path to differentiate? Are we on a path to be the lowest cost?

Those are both good pass depending on the circumstances but we we gotta usually decide which path we’re gonna be on because if we’re gonna really differentiate and have better quality and better service and You know better educated Salesforce.

It’s gonna be hard to at the same time be lower cost That’s what we’ve learned so we’ve got to figure out what path were on And then we have to turn it into a strategy using the value chain And again, I hope everybody here is familiar with that concept it’s quite embedded now and management thinking the value chain says You know for any business there’s a whole set of things that we have to do in order to conduct that business Logistical things, operating things which could be manufacturing, marketing, sales service, supply chain Technology development you see this and and this this this idea called the value chain is a way of mapping What what operation in this industry looks like? And this slide is just an example in the telecom in the mobile communication business So a sprint or an AT&T in our country, here’s the value chain in that business So you can see if you go back.

This is sort of a general set of titles, but this says okay now in mobile phones We don’t say we have to talk about device coverage What set of mobile phone Types, do we support in our network? And then there’s kind of we got to have a network We got to operate the network and make that network efficient So you get you get the bars and you don’t lose your service and you know you can here and and so forth and then we got to figure out how to price pricing is very complicated in mobile phones all kinds of special deals prepaid, postpaid So there’s there’s a lot of choices in activity there, bill processing, there’s a lot of marketing, promotion, PR After sales support and so forth. So every business has a value chain Every one of your businesses has the value chain and if you’re going to be disciplined and rigorous about strategy You’ve got to you’ve got to really lay out what that value chain is because strategy is fundamentally the set of choices you make across the value chain So what kind of network am I going to operate What’s my pricing approach How am I going to distinguish myself from a competitor? You know, what what tools am I gonna use for marketing? Am I gonna have a lot of physical locations and stores or I’m going to use primarily? Advertising what am I going to do to market my service versus the other guy and so forth and so on Strategy isn’t sort of any esoteric thing.

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It’s simply a set of choices about how we are going to operate the business Including choices about the technology we’re gonna sell you know, The function of our product the features of our product the technology of our product and A good strategy is one where there’s clarity on the choices we are really making and There’s enough things that we’re doing differently that we can get a competitive advantage So let’s talk a little bit more of that about that The first kind of key idea here in going from kind of a value chain to strategy is the notion of operational effectiveness versus strategic position This is a idea that I didn’t have when I first published my first work books in this field I was thinking mostly about strategy but but I I didn’t really make make the distinction That there’s a lot that a company does that isn’t strategy There’s a lot of best practice If we’re going to be in the auto industry, there’s a lot of things we have to do just to be a good auto company You know, we have to buy the right kind of machines for our factory we have to have you know, a decent dealer network we have to You know learn how to execute good advertising.

There’s a lot of best practice in every industry and What we’ve learned is if you’re not using best practice, you’re gonna lose No matter what your strategy is If you’re not buying the latest manufacturing equipment your competitors are gonna win You’re gonna you’re gonna you’re gonna give up too much cost and quality through that So what we have to understand is in any company, we have two jobs one is we got to implement all the best practices? That we can find If we see somebody doing a better approach to customer, you know customer care You know, we better look hard at that and make sure that we’re at least at some, you know, threshold level of best practice That’s operational effectiveness But operational effectiveness is not strategy Operational effectiveness is doing the same things as your competitor, better and better and better It’s raising the bar on the same things as all your competitors are doing.

Your competitors have a factory they have machines If you buy the newest machines first, then you’ll have an advantage you’ll be operationally better than them until they buy the machines But that’s not strategy Strategy is on top of operational effectiveness you’ve got to sort of operate the business well, but on top of that you have to have a strategy and that strategy is building on the best practices, but then including the choices that are going to define your uniqueness in the business Both of these things are important if we’re just sloppy and not enhancing our operation operational effectiveness, we’re gonna lose. No matter what strategy we have? But just being operationally effective is not going to get us to superior performance because all our competitors are going to be implementing the same best practices as we do So if we really want to win we got to do both and we’ve got to make sure that we’re clear about What we’re doing?

And this is a very very important distinction

You know the question I used to get all the time, you know, 15 years ago 10 years ago can you be both low cost and differentiated at the same time and The answer is usually you can’t But the cases that look like you’re doing that are cases where the competitor has lousy operational effectiveness Then you can be both low cost and differentiated But if you’ve got a good operationally effective competitor Then to differentiate or to be lower cost you’re gonna have to make real choices Okay, and you’re not going to be able to do those both at the same time Probably you’re gonna have to decide which path you’re on Am I on the path of differentiating? Am I on the path of being the lowest cost producer? To have a successful strategy We’ve come to understand that the process Involves, you know these basic conditions Number one, to have a truly successful strategy, we have to define a unique value proposition We can’t just be trying to do the same thing as our competitors are trying to do We have to be doing something unique and that involves Serving a different set of customers We’re going after the large industrials, our competitors are going after the medium-sized smaller companies That’s one part of the value proposition.

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What customers are we actually trying to serve? Again so many companies the customers they have they sort of got by luck But most important ideas in strategies you’ve got to choose your customers you actually have to choose who you want your customers to be and If you choose I want all customers. I want to serve every single customer. That’s usually not a good choice Because customers have very different needs Particularly in a complex economy like like this one You know another another Question, you’ve got to ask of the customers I choose to serve which of the needs of that they have do I want to actually meet uniquely well Again a lot of companies just fall into the idea that anything the customer wants, I’m gonna try to provide But actually, you know, most great strategies don’t do that Or at very least they’re very specific about which customer group and then they say, okay, I’m gonna go after this customer group And I’m going to then really meet all their needs But the idea that we just try to meet all the needs and anybody ever comes and asks us to meet that’s usually not a good strategy and Then we’re gonna have to make that choice about pricing Are we going for a premium price or we try just to match the other guy? Or are we going to offer discount because we think we’re going to be more efficient and able to sustain that discount and still make good profits You know, this is a company that’s on its way to India.

I Don’t think it’s actually opened yet. It’s been struggling to get into India like historically number of companies have to have had to do this is one of the most extraordinary companies in the world in the area of furnishings IKEA some people call it IKEA.

It depends on are you speaking more Scandinavian and are you speaking more American? And this is a company that that sells home furnishings And this is kind of a great strategy example Strategy starts with a unique value proposition and What you see here is kind of a sort of simple description of what their value proposition is who are the customers? That they really are seeking to serve and what are they delivering those customers in terms of Products to meet those needs and where are they pricing? Okay, so I will I won’t read this But just take a quick look at that.

Okay, and You know The interesting thing about this value proposition is nobody had ever seen this before this company Nobody had ever segmented customers in this way Nobody had ever thought about customers with relatively small living spaces before this was an innovation in thinking about segmentation and a lot of great strategies involve this new way of looking at customers and segmenting customers like these guys did Also, this strategy was a real breakthrough in You know kind of operations for a furniture company and we’ll talk about that in a minute Here’s another great strategy example remember I talked about heavy trucks earlier and How difficult in industry it was the average profitability not so good Well, here’s the company in the industry that is the premium superior high profitability company. It’s called Paccar it’s it’s it’s quite a global company and You sort of see what their value proposition was So IKEA was about really low prices this company is about a premium We’re gonna get a premium 10% for our trucks Because our trucks are not going to look like our competitors trucks our trucks are We’re going to have a we can have a strategy in about customization Cost of operation that will allow us to actually differentiate But not for all customers This is a wonderful strategy because this company figured out that the big customers in the industry Weren’t the customers that were the good customers for them.

They actually figured out that the small customers The people that owned one truck and drove that truck for their living That was that was the really interesting customer in this industry So they built the whole strategy around this narrow group of customers about 25 to 30 percent of all the customers that buy trucks are buy one or two trucks and They often drive their own truck. Okay Second Test of a great strategy again. Think about your own company here a Distinctive value chain, if you if you don’t operate the business differently Your value chain isn’t going to be real You’ve got to have a different operating model that aligns with your positioning Ok, so if we take IKEA and I won’t go through this if you look at how they operate there their company compared to all the other companies in their industry they do it differently They have a different value chain Their stores look different their customer service looks different Their logistics looks different and it’s all aligned with that value proposition They’re their breakthrough idea was that they wouldn’t that they they sell not fully assembled furniture they assembled parts They sell parts in a box so when you go to IKEA You buy you walk out with a box in which there are the parts of the furniture.

You just bought and You get the opportunity to actually take the furniture home yourself You don’t get somebody with a van, you know delivering dropping off completed furniture at your house IKEA understood that that was that was good most a lot of customers like that But the customers they liked they wanted to serve who was very price-sensitive They were willing to deliver themselves They would they would deliver their own furniture And by by doing it that way and by also having inbound logistics in Not entire sofas, but the parts for a sofa in a box they saved huge amounts of logistical costs and They took that savings and They passed it on to the customer in terms of much lower price, but the customer then had to put the furniture together themselves I have a daughter one of my daughters happens to love this company and I had the privilege of helping her You know renting a car when I visit her at college so that we could take the box home For my IKEA .

I went to IKEA many times and and then you have to take the box home and then you have a You know, then you get to put it together. It’s like somebody’s birthday. You have to put together the birthday present, you know, or Christmas it’s like putting together the toys And you know, that could be fun. I frankly found it very tedious I have a lot of fun doing it, but my daughter really liked this company the value proposition worked for her It didn’t actually work for me. In fact, I pretty much hated every minute. I was in that store. I didn’t like the service, there is no service. They deliberately organized the store so you get lost and you can’t get out When you’re checking out you have to go to this these big huge racks and and and you have to pull down the box of what you’re buying and Then schlep the box You know to the check-in counter and then pay your bill and then you have to take the box out and load it in your car and then you have to drag the box up to the apartment of your daughter in my case and Then you get to spend 30 or 40 minutes trying to figure out how to put the thing together Not a good idea for me, my daughter loved it It was it met her needs for reasonable price They have very nicely designed products and style products very Scandinavian But they’re very low-cost.

They’re really high quality really low cost that worked for her and this tells you something very important about strategy and that is that one of the things a great strategy does is it doesn’t please every customer If you’re trying to please every customer You don’t have a strategy A good strategy makes some customers unhappy If every customer is happy you’re in trouble If every possible customer in the industry likes what you’re doing then the odds are that you’ll never really be successful Strategy is fundamentally about choosing who exactly you are trying to please and then engineering a value chain in order to deliver on that? Here’s here’s Paccar, you know another critical part of a successful strategy is the concept of trade-offs a Trade-off is where in order to deliver one benefit you give up on another benefit and that’s what IKEA did you know, they to get that really low price of nicely style furniture and in order to do that you had to go through an awkward experience in the store You had to take the product home yourself, and you had to put it together yourself And that was a trade-off that they were willing to make because they understood that’s what their customers really …

That was the trade-off they wanted to make Strategies about choice About choosing what you want to do? But one of the phrases that I Said at some point and I found has been very powerful is the essence of strategy is what you choose not to do It’s the service you don’t offer it’s the functions you don’t provide It’s the benefit you don’t offer That’s the essence of strategy if you can be clear about that That’s a good sign that you can be clear about your overall strategy Okay, so time is very short But in terms of a successful strategy we’ve got to connect the dots across the value chain You got to make sure the service connects with the way we mark it connects with our Kind of product value proposition the pieces fit together across the value chain And there’s continuity you Can’t be changing strategy all the time.

It takes like two three years to implement a strategy Because you’ve got to get all those pieces aligned around what your what your ultimate position is And continuity becomes crucial okay again, you can look at some of these examples and talk about it even further When we think about strategy one of the things that I you know I find very helpful to think about and might be helpful for you is what kind of competition are we creating in our industry and And the wrong answer is we’re creating a zero-sum competition we’re all doing the same thing beating each other up on price That’s not the competition we want But we want to create is really more of a positive some competition where we’re all have a different strategy We’re all trying to do something a little bit different. We’re serving different customers. We’re trying to meet different needs That’s the kind of competition we want That’s the competition. We’re actually the whole industry can be more attractive and competitors can do well in terms of corporate strategy Again, I’ve already covered the idea that there’s multiple levels if you’re in a very large group, there might be a third level There might be groups of businesses Clumped together because the old company and the whole company has so many businesses that to manage it.

You’ve got to clump it into groups So there might be a level of group strategy You know, what are the key questions of corporate level strategy, you know, first of all understanding what different businesses you’re in Becomes really critical Because you need a strategy for each distinct business and sometimes companies get confused In fact what I find is usually you think of your business too broadly and don’t realize that actually the truck industry is not one industry, there’s heavy trucks and light trucks and those are totally different businesses So, you know key question for corporate strategy is sorting out what the different businesses are Do we have the right portfolio? Is each business attractive in of itself? and then do the businesses .. Are we the best owner for the business? Does the business reinforce each other? Do we have synergy? Is there a logic for how the businesses fit together? and so on okay.

This is kind of these are the key questions of corporate level strategy. It’s a different animal It builds on business strategy, but it’s different Ultimately in corporate strategy were trying to create synergies across businesses If there’s no synergies, we’re probably better off You know selling it Because we’re not going to be able to add any value And this just talks about the kind of synergies that we might be pursuing and we got to make sure they’re real We got to make sure they’re actually meaningful they’re not just a little benefit but they’re big deal You know, here’s the ultimate synergy company Disney that that has many many different businesses, but they’re all united in a common Positioning basic value proposition They’re sharing lots of resources like characters and and and and and you know video properties and so forth leveraging across all these businesses and

this company has been remarkably robust in a very unstable industry where Where some years you make a good film then actually make a lousy film people go up and down, but Disney a real robust Corporate strategy that’s given them a lot of resilience over time And then I guess let me finish up this section By talking about well, what’s our job as leaders in strategy? and What I found is that the head of a business unit You know and and the CEO of the overall corporation ultimately you have to be the chief strategist The reason is that nobody else has the right perspective for strategy except the ultimate leader Everybody down in the organization is thinking about their part of the company their business their function the marketing department the production department the R&D The only person that really has the true strategy perspective is the person that’s actually running the overall business So you’ve got to use your people to get information, you’ve got to make it a team process, but ultimately you have to decide Strategy can’t be a popularity contest where everybody gets a vote Because essence of strategy is about choices and We’ve got to make one Clear set of choices.

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We can’t we can’t have sort of Oh, well, we’ll do this and we’ll do this and we’ll do this and we’ll do this. Oh, yes marketing I know you want to do this. We’ll do a little bit of that too you will end up in … you’re not going to do well, you’re not going to have a strategy You as the CEO got to make sure that you have a great strategy process You got to make sure that first of all you’ve got the right business units organized and they’ve got a got You’ve got a great team working on a strategy for each of those business units You got to make sure they’re answering the right questions You shouldn’t ask the question of how much is the industry going to grow for the next ten years and think that’s the key question That’s one question … a lot of other key questions every strategy has to address, the industry where do we stand today? How would we benchmark our performance across the value chain who is a competitor our key competitors? How are they doing? Where do they stand what are their value chains look like? there’s a lot of key questions in a good strategy and the only person is going to make sure you have the right questions is you Because you’re the person that’s actually in charge of pulling it together and making the choices at the end of the day You know, you got to make sure the right people are involved in the strategy process? you know, that’s your job as a leader and what we know is strategy has to be done collectively by the multi-functional team.

A strategy to each functional department and let them do the production strategy and the marketing strategy and the service strategy that never works We’ve got to get those people together doing the strategy together Because all those pieces have to fit together You you know, there’s no such thing is good marketing There’s only good marketing for a particular strategy So we can’t let the marketing guys go running off and do good marketing we’ve got to put their Role in the context of the overall positioning. We’re trying to achieve in the market That’s that’s what great strategy is all about and guess whose job it is to make sure that happens you The person who has the overall holistic perspective of the business You know your board of directors we found you need to have let your board of directors See the strategy before they have to approve it Board of directors want to participate in the process now it’s not their job to develop the strategy, but they’re usually smart people and it’s very helpful to get their input and then you can come back to them with your what you want them to approve And as long as they’ve been part of the process and felt like they got some ownership in the process They’re gonna be really comfortable.

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But if you just show up one day and say here’s my strategy everybody vote. Yes Then you’re gonna you’re gonna erode your Capital with the board and you’re going to need the board to support you because every company has ups and downs and You need the board to be there and understand What are you doing and how you’re doing it? And so that when things go wrong, they don’t panic And if the stock price goes down they don’t freak out A great strategy needs the commitment of the board The awareness of the board the understanding of the board and so how to bring them into the process without them thinking they do it You know, that’s your job as a leader And depending on your company and and how serious your issues are you’ve got to calibrate How much you want to play directly in the process? Versus kind of sort of oversee the process and and that really depends on the situation You know, if you’ve got a real turnaround

you’re gonna have to lead the whole process If you’ve if you’ve come in and in a really bad situation you’re just got to lead the whole thing Don’t delegate it to strategic planning But you know if you’re in a pretty stable company you’ve got a good team then your job is really to set the right process up and then check in and see how they’re doing One of the things we’ve learned I’ve done a lot I’ve trained now probably, you know 350 of the top CEO in the world they come to Harvard for a bootcamp We call it the new CEO workshop and when a CEO gets appointed We invite them and we have about a dozen, you know Two or three times a year come together as a group and we go through you know, okay What do you have to do to be a successful CEO?

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and we know a lot about that and we go through that process and one of the things we we do in that workshop is we we talk a lot about why a great leader doesn’t want to have to reject the work of his team or her team And the worst thing you want to have to reject is the strategic plan People do a lot of work They think very hard they get themselves all excited and they come together with a great plan and they’re presented to you the worst thing that you have to do is say no Because if you reject that plan First of all, it’s a reflection that you created a lousy process the wrong people the wrong questions It’s also a sign that you didn’t check in to see if they were moving in the right direction you want to make sure that they’re thinking the right way, they’re on the right path Encourage them to you know, don’t do it for them, but check in What you want to do in a strategy process is you want to be really happy and say that’s a great work.

That’s great work and then you’re gonna motivate your team to really be responsible and to really move the business forward but if you reject their strategy Because you didn’t really pay much attention to what they were doing And you just you’re just having the meeting, you know at the end of six months Then what’s gonna happen? You’re gonna have to do it Every one of your team is always going to want you to approve anything before they do too much work on it.

They’re gonna create Dependence on you as the leader So as a leader one of your most critical jobs is to essentially create the right processes to allow your team to succeed and Check in So that if people get off on the wrong track that you’re not comfortable with you don’t have to reject their work at the end What you want to do is the CEO is you want to celebrate the work of your team You want to celebrate the strategy that they’ve come up with that you’re that you’re comfortable with because you were you were there and you orchestrated the process and you checked in and you you gave feedback and and and the group learned and and Here we are with something great That’s what strategic leadership is all about at your level.

The people most of you in this room are at that level..

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