The presentation done by Michael E. Porter in Istcell Leaders Conference in Istanbul

1. Strategic Thinking: Implications for Turkish Companies
Professor Michael E. Porter
Harvard Business School
Istanbul, Turkey
October 17, 2009
This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); ―What is Strategy?‖
(Harvard Business Review, Nov/Dec 1996); ―Strategy and the Internet‖ (Harvard Business Review, March 2001) 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 for Strategy and Competitiveness, www.isc.hbs.edu. Version: Oct 14, 2009
20091017 – Turkcell (Strategy).ppt 1 Copyright 2009 © Professor Michael E. Porter

2. Strategic Thinking
COMPETING TO BE THE BEST COMPETING TO BE UNIQUE
• The worst error in strategy is to compete with rivals on the same dimensions
20091017 – Turkcell (Strategy).ppt 2 Copyright 2009 © Professor Michael E. Porter

3. Flawed Concepts of Strategy
• Strategy as action
– “Our strategy is to merge…”
– “… internationalize…”
– “… consolidate the industry…”
– “…double our R&D budget…”
• Strategy as aspiration
– “Our strategy is to be #1 or #2…”
– “Our strategy is to grow at…”
– “Our strategy is to provide superior returns to our shareholders…”
• Strategy as vision
– “Our strategy is to best understand and satisfy our customers’ needs…”
– “…to advance technology for mankind…”
• Strategy defines the company’s distinctive approach to competing and the competitive
advantages on which it will be based
20091017 – Turkcell (Strategy).ppt 3 Copyright 2009 © Professor Michael E. Porter

4. Setting the Right Goals
• Strategic thinking starts with setting proper financial goals for the company
• The fundamental goal of a company is superior long-term return on investment
• Growth is good only if superiority in ROIC is achieved and sustained
– ROIC threshold
• Setting unrealistic profitability or growth targets can undermine strategy
20091017 – Turkcell (Strategy).ppt 4 Copyright 2009 © Professor Michael E. Porter

5. Shareholder Value Is Not The Goal
Superior Economic
Shareholder Value
Performance
• Sustained ROIC and Growth • Stock Price
• Shareholder value is the result of creating real economic value
• Pleasing today’s shareholders is not the goal
20091017 – Turkcell (Strategy).ppt 5 Copyright 2009 © Professor Michael E. Porter

6. Levels of Strategy
Competitive or
Business Strategy
• How to compete in each distinct business or industry
Corporate or Portfolio Strategy
• The company’s overall mix of businesses and the integration of
business unit strategies
20091017 – Turkcell (Strategy).ppt 6 Copyright 2009 © Professor Michael E. Porter

7. Economic Fundamentals of Competition
• The unit of strategic analysis is the industry
− Defining the relevant industry is essential to sound strategy
• Company economic performance results from two distinct causes
Relative Position
Industry
Within the
Structure
Industry
- Overall Rules of Competition - Sources of Competitive Advantage
• Strategic thinking must encompass both
20091017 – Turkcell (Strategy).ppt 7 Copyright 2009 © Professor Michael E. Porter

8. Disaggregating Economic Performance:
Industry vs. Position
35%
31.6%
30%
27.8%
Return on 25% ROIC = Earnings before interest
Invested Capital and taxes divided by invested
1993-2007 capital less excess cash
20%
15%
13.6%
10.5%
10%
5%
0%
Revlon Paccar
Industry Average
Note: Excess cash is calculated by subtracting cash in excess of 10% of annual revenue.
Source: Compustat (2008), author’s analysis
20091017 – Turkcell (Strategy).ppt 8 Copyright 2009 © Professor Michael E. Porter

9. Understanding Industry Structure
Threat of Substitute
Products or Services
Bargaining Power Rivalry Among Bargaining Power
of Suppliers Existing Competitors of Buyers
Threat of New Entrants
20091017 – Turkcell (Strategy).ppt 9 Copyright 2009 © Professor Michael E. Porter

10. Redefining Industry Competition
Zero Sum Competition Positive Sum Competition
• Compete head to head • Compete on strategy
• One company’s gain requires other • More than one company can be
companies loss successful
• Competition undermines industry • Competition expands the value
value pool
20091017 – Turkcell (Strategy).ppt 10 Copyright 2009 © Professor Michael E. Porter

11. Positioning and Industry Structure
Heavy Trucks
Threat of Substitute
Products or Services
• Railroads
• Water transportation
Bargaining Power of Rivalry Among Bargaining Power
Suppliers Existing Competitors of Buyers
• Large independent suppliers • Heavy price competition on • Large fleets
of engines and drive train standardized models • Leasing companies
components • Small fleets and owner operators
• Unionized labor
Threat of New Entrants
• Many truck producers are
assemblers
20091017 – Turkcell (Strategy).ppt 11 Copyright 2009 © Professor Michael E. Porter

12. Paccar Strategic Positioning
• Focus on owner-operators
• Design trucks with special features and amenities
• Customization and build-to-order
• Design for low truck operating costs
• Offer extensive roadside assistance to truckers
• Premium price
• Different customers / different basis of competing
20091017 – Turkcell (Strategy).ppt 12 Copyright 2009 © Professor Michael E. Porter

13. Strategic Positioning
Economic Fundamentals
Differentiation
(Higher Price)
Competitive
Advantage
Lower Cost
20091017 – Turkcell (Strategy).ppt 13 Copyright 2009 © Professor Michael E. Porter

14. Foundations of Competitive Advantage
The Value Chain
Firm Infrastructure
(e.g. Financing, Planning, Investor Relations)
Human Resource Management
Support (e.g. Recruiting, Training, Compensation System)
Activities Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research) M
Value
Procurement a
(e.g. Components, Machinery, Advertising, Services) r What buyers are
g willing to pay
Inbound Operations Outbound Marketing After-Sales Service i
Logistics Logistics & Sales
(e.g. Installation, n
(e.g. Incoming Material (e.g. Assembly, (e.g. Order Processing, (e.g. Sales Force, Customer Support,
Storage, Data Component Warehousing, Report Promotion, Complaint Resolution,
Collection, Service, Fabrication, Branch Preparation) Advertising, Proposal Repair)
Customer Access) Operations) Writing, Web site)
Primary Activities
• Competing in a business involves performing a set of discrete activities, in which competitive
advantage resides
• Strategy is reflected in how activities in the value chain are configured and linked together
20091017 – Turkcell (Strategy).ppt 14 Copyright 2009 © Professor Michael E. Porter

15. Achieving Superior Performance
Operational Effectiveness is Not Strategy
Operational Strategic
Effectiveness Positioning
• Assimilating, attaining, and extending • Creating a unique competitive position
best practices
Do the same thing better Do things differently to meet different needs
20091017 – Turkcell (Strategy).ppt 15 Copyright 2009 © Professor Michael E. Porter

16. Five Tests of an Excellent Strategy
• A unique value proposition
• A different, tailored value chain
• Clear tradeoffs, and choosing what not to do
• Activities in the value chain that fit together
and reinforce each other
• Strategic continuity with continual
improvement in realization
20091017 – Turkcell (Strategy).ppt 16 Copyright 2009 © Professor Michael E. Porter

17. Strategic Positioning
IKEA, Sweden
Distinctive Activities
Value Proposition
• Young, first time, or price-sensitive buyers • Modular, ready-to-assemble, easy to package designs
• Stylish, space efficient and scalable furniture and accessories at • In-house design of all products
very low price points. • Wide range of styles displayed in huge warehouse stores with
large on-site inventories
• Self-selection
• Extensive customer information in the form of catalogs, explanatory
ticketing, do-it-yourself videos, and assembly instructions
• Ikea designer names attached to related products to inform
coordinated purchases
• Long hours of operation
• Suburban locations with large parking lots
• On-site, low-cost, restaurants
• Child care provided in the store
• Self-delivery by most customers
20091017 – Turkcell (Strategy).ppt 17 Copyright 2009 © Professor Michael E. Porter

18. Defining the Value Proposition
What Customers? Which Needs?
• What end users? • Which products?
• What channels? • Which features?
• Which services?
What Relative Price?
• Premium? Discount?
• A distinctive value proposition usually expands the market
20091017 – Turkcell (Strategy).ppt 18 Copyright 2009 © Professor Michael E. Porter

19. Five Tests of an Excellent Strategy
• A unique value proposition
• A different, tailored value chain
• Clear tradeoffs, and choosing what not to do
• Activities in the value chain that fit together and
reinforce each other
• Strategic continuity with continual improvement
in realization
20091017 – Turkcell (Strategy).ppt 19 Copyright 2009 © Professor Michael E. Porter

20. Making Strategic Tradeoffs
• Tradeoffs exist where strategic positions are incompatible
Strategic Tradeoffs
– Incompatible product or service features or attributes
– Differences in the value chain deliver a chosen value proposition
– Inconsistencies in image or reputation across positions
– Limits on organizational capacity to implement multiple ways of competing simultaneously
• Tradeoffs make strategy hard for competitors to imitate
• An essential part of strategy is choosing what not to do
20091017 – Turkcell (Strategy).ppt 20 Copyright 2009 © Professor Michael E. Porter

21. Strategic Tradeoffs
IKEA, Sweden
IKEA Typical Furniture Retailer
Product Product
• Low-priced, modular, ready-to-assemble designs • Higher priced, fully assembled products
• No custom options
• Customization of fabrics, colors, finishes, and sizes
• Furniture design driven by cost, manufacturing simplicity, and • Design driven by image, materials, varieties
style
Value Chain Value Chain
• Centralized, in-house design of all products • Source some or all lines from outside suppliers
• Medium sized showrooms with limited models on display
• All styles on display in huge warehouse stores • Limited inventories / order with lead time
• Extensive sales assistance
• Large on-site inventories
• Limited sales help, but extensive customer information • Traditional retail hours
• Long hours of operation
20091017 – Turkcell (Strategy).ppt 21 Copyright 2009 © Professor Michael E. Porter

22. Integrating the Value Chain
Zara Apparel
Word-of-mouth Cutting- edge
Customers chic fashion at
marketing and
but cost- moderate price
repeat buying
conscious and quality
Wide range of
styles Global team of
trend-spotters
Very frequent Majority of Advanced
Little media
product production in production
advertising
changes Europe machinery
Extensive use
of store sales
Prime store data
locations in high
traffic areas Very flexible
Tight coordination production
JIT delivery with 20 wholly- system
owned factories
• Strategic fit comes from leveraging what is different to be more different
Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS
20091017 – Turkcell (Strategy).ppt 22 Copyright 2009 © Professor Michael E. Porter

23. Strategic Continuity
• Continuity of strategy is a precondition for sustainable competitive advantage
– e.g., understanding the strategy
– building truly unique skills and assets
– establishing a clear identity
– strengthening fit
• Reinvention and frequent shifts in direction are costly and confuse the customer, the industry, and
the organization
• Strategic continuity requires an enduring value proposition while continuously improving ways to
realize it
– Strategic continuity and continuous change should occur simultaneously
– Continuity of strategy allows learning and change to be faster and more effective
20091017 – Turkcell (Strategy).ppt 23 Copyright 2009 © Professor Michael E. Porter

24. Growing Strategically
1. Make the strategy even more distinctive
2. Deepen the strategic position with target customers (rather than broaden it)
3. Expand geographically to tap new regions or countries using the same positioning
4. Expand the market for what the company can uniquely deliver
• It is an illusion that growth in new, unserved segments is profitable
• It is dangerous to attempt to grow faster than the underlying market for an extended
period.
• Industry leaders should concentrate as much, or more, on growing the industry as on
growing market share
20091017 – Turkcell (Strategy).ppt 24 Copyright 2009 © Professor Michael E. Porter

25. Creating Corporate Value Added
M
a
r
g
i
n
M
a
r
g
i
n
• Successful companies capture interrelationships across the value chains of business units
– Transferring proprietary knowledge and skills across units
– Sharing activities across business unit value chains
20091017 – Turkcell (Strategy).ppt 25 Copyright 2009 © Professor Michael E. Porter

26. Diversification in an Emerging Economy
Developing Country Diversified Companies in Advanced
Conglomerate Economies
Walt Disney
Hollywood
Pictures
Time
Real Sharing Miramax
Estate Mickey’s Touchstone
Develop- Kitchen*
Computer ment Resort Motion
Wholesaler Hotels Picture
Distribution
Cruise
Fast Food Real Estate Line
Franchises Family
Services Motion
Theme
Parks Pictures
Financial Airline Tobacco
Services Sports
Team Animated Traveling Multi-
Broadway Broadway
Feature Films media
Imports/ Food Shows
Productions
Productions Theater
Distribution Processing
Direct Consumer Television
Grocery Marketing Products Program-
Hotel Textiles Disney ming Disney
Stores Records Channel
Industrial Retail Adult
Car Stores Youth Cable
Dealership Parts Books and Channels
Educational
Hollywood Materials
Records
Sugar
Television
Network
Hyperion
Books Adult
Discover Radio
Publishing / Television
Magazine Stations
Newspapers Stations
20091017 – Turkcell (Strategy).ppt 26 Copyright 2009 © Professor Michael E. Porter

27. Strategic Thinking at Turkish Companies
• Low Price • Superior Value
• Share of Market • Unique Position
• Product / Product Innovation • Customer Experience
• Total Customer Support
• Export Uniform Products
• Locally-Tailored Global Strategy
• Large Business Groups • Integrated Multi-Business Companies
20091017 – Turkcell (Strategy).ppt 27 Copyright 2009 © Professor Michael E. Porter

28. Obstacles to Strategic Thinking
• Misunderstanding of strategy principles
• Industry conventional wisdom leads all companies to follow common practices
• Customers ask for incompatible features or request new products or services that do
not fit the strategy
• Inappropriate goals and performance metrics bias strategy choices
• A desire for consensus blurs strategic tradeoffs
• Short term pressure to please shareholders
20091017 – Turkcell (Strategy).ppt 28 Copyright 2009 © Professor Michael E. Porter

29. Understanding Strategy
What Is a Strategy? What is Not a Strategy?
• A unique value proposition compared to other • Best practice improvement
organizations • Execution
• Aspirations
• A different, tailored value chain • A vision
• A brand
• Clear tradeoffs, and choosing what not to do • Learning
• Agility
• Flexibility
• Activities that fit together and reinforce each
other • Innovation
• The internet (or any technology)
• Downsizing
• Strategic continuity with continual improvement
in realization • Restructuring
• Mergers / consolidation
• Alliances / partnering
• Outsourcing
• Internationalizing
• Networking
20091017 – Turkcell (Strategy).ppt 29 Copyright 2009 © Professor Michael E. Porter

30. The Role of Leaders in Strategy
• Drive operational improvement, but clearly distinguish it from strategy
• Lead the process of choosing the company’s unique position
– The CEO is the chief strategist
– The choice of strategy cannot be entirely democratic
• Communicate the strategy relentlessly to all constituencies
– Harness the moral purpose of strategy
• Maintain discipline around the strategy, in the face of many distractions.
• Decide which industry changes, technologies, and customer needs to respond to, and how the response
can be tailored to the company’s strategy
• Measure progress against the strategy using metrics that capture the implications of the strategy for
serving customers and performing particular activities
• Sell the strategy and how to evaluate progress against the strategy to the financial markets
• Commitment to strategy is tested every day
20091017 – Turkcell (Strategy).ppt 30 Copyright 2009 © Professor Michael E. Porter

31. Strategy in Economic Downturns
• Create a positive agenda
• Refocus on strategy
• Return to economic fundamentals
• Downsize to a strategy, not across the board
• Do not overreact to distressed industry conditions
• Use the downturn to get things done that would be more difficult in normal times
• Position for long term economic performance, not near term stock price
• Seize opportunities for discontinuities which are more likely to emerge
• Strategy is more important in downturns, not less
20091017 – Turkcell (Strategy).ppt 31 Copyright 2009 © Professor Michael E. Porter