Strategic thoughts for competitive companies
Professor Michael Porter of the Harvard Business School is considered by many to be one of the most influential thinkers in the world on business strategy. He talks to Graham Hand about how he forms his ideas.
Professor Porter has been at the forefront of competition theory and economic development research for 25 years and is only the fourth faculty member in the history of the Business School to earn the Professor distinction.
He is the author of 16 books, of which several are compulsory reading for major MBA, finance and marketing degree courses around the world. He has won numerous awards and honours, including the Wells Prize in Economics, the Adam Smith Award and Honorary Doctorates from seven other university. He has also published over 80 articles, four of which won the McKinsey Award for the best Harvard Business Review article of the year. In 1991, he received the Charles Coolidge Parlin Award for his outstanding contribution to the field of marketing and strategy given by the American Marketing Association. In 1991, Professor Porter was honoured by the Massachusetts State Legislature for his work on Massachusetts’ competitiveness. In 1993, the Academy of Management named him the Richard D. Irwin Outstanding Educator in Business Policy and Strategy.
Professor Porter also consults widely to governments and industry, including AT&T, Credit Suisse, Du Pont, Proctor & Gamble and Royal Dutch Shell.
Do you believe your long-term views on what creates a competitive advantage have been vindicated in recent years?
I feel events are now showing that some of the fundamental things that I have been talking and writing about for some time seem reasonably robust. I delayed publishing a book when I was concerned two or three years ago that it was not the right moment. There was too much new economy, although I didn’t anticipate the kind of corporate governance scandals we have now. I anticipated that the balloon would come out of the Internet and out of corporate performance, but the scandals have telescoped that.
You once said that you felt a degree of loss of relevance in the late 1980s and early 1990s. What happened then?
I redirected most of my energy around the competitiveness and economic development part of my work, and was quite proud of The Competitive Advantage of Nations book, and the influence that this body of work was having. I retreated from strategy for a number of years, partly because I was doing something else, and partly because we have a Competitive Strategies Group at Harvard, which I had built, and was trying to provide space for others to take the ball in the field. For better or for worse, I was a 900-pound gorilla. If I worked on something it would tend to get the attention. When you are in the position I was in, in those days with strategy, it becomes very tempting, at least for academics, to use the work of the “leader” as the foil. There were many articles and books written that started out with “Well, Porter says this…”
Yes, and every time you picked up a textbook.
Right. And the second paragraph would be how it was wrong and that someone had a new way of doing it. The combination of those things led me to back away a little bit from the field but I remained interested. In about 1995, I finished what I was doing on the competitiveness of nations and focused on strategy again. There was a burst of activity for about two years, and out of that came the article: What is Strategy? For me, it was a major breakthrough from the work I had done before. It wasn’t that it was changing anything but it was the next chapter. It was the beginning of the third generation of my work. I’ve been bubbling along on that line of work ever since, the Internet article being an example. I slowed down in publishing because I was concerned about the timing but now, I think it is a great moment, and I just wish I had the book ready. However, even when it comes out, I think it will be a good time.
Were some of the major themes of your work, especially those with the most enduring qualities such as the concepts of the Five Forces and the Value Chain, conceived in moments of inspiration or was it a result of two years’ work?
I think it was more the latter. I am always empirically led, in the sense that I am exposed to a tremendous number of examples in industries, including case studies in the Business School that I or my colleagues write. So I have this data set. In the case of the Five Forces, I had started industrial economics and I was aware of Bain, and his work on industry structure in the limited sense that was used in economics in those days. The Five Forces took me a long time. I actually wrote a whole book, trying to take industrial organisation and apply it to strategy and I probably finished it around 1975 or 1976.
That’s five years earlier than when it was published.
Yes. I had showed it to a publisher and after listening to him, I decided to throw it away. It took me a while to figure out that the Five Forces were the right way to look at it. The Five Forces were first put in print in a course note that I believe was written in about 1976 and I used it in teaching. It saw the light of day in the Harvard Business Review article in 1979. The same thing happened with the Value Chain, although it was a little shorter.
By the time I published Strategy, I was well underway in working on Advantage. The Strategy book was about industry, and I had one chapter about companies and company positions, which was a generic strategy concept. But I understood that in order to take that to the next level, I needed to create a theory of the firm, a way of characterising it at a more granular level, and so I started down that road. Then the new work What is Strategy? was motivated, first and foremost, by some common questions and challenges that I received about the earlier work, probably the most important of those was “Gee, you can be low-cost and differentiated at the same time”.
The classic Japanese example, like Toyota?
Right. What I finally figured out was that it is only if your competitors are not operationally effective. I figured out that there was another dimension I had not thought of, and then I was able to clarify in my own mind this concept of tradeoffs: why there were tradeoffs and where they came from. I then laid out the Value Chain view of the world. I had this notion that there were linkages across activities. Initially, my work tends to be led purely by empirical data and then over time the challenges and the exceptions become very important in pushing your thinking to the next level.
What do you think of company culture?
I think we need to be more systematic about it because it is unmistakable when you look at case studies. You walk in the door at Nucor Steel and it couldn’t seem more different to another steel company. You walk in the door at Wal-Mart and it couldn’t be more different than going to Tiffany’s. We have started to see where we could be more rigorous about what culture really means and I don’t think we’ve got there yet.
One of the most important insights is that culture is supposedly the stuff that is not codified in the organisational structure or the incentive system. It’s more the informal, non-explicit, environmental norms of behaviours and values. The most important point to make about culture is that there may be some things about it that are universally good but there’s no good culture per se. There’s just a culture that fits the strategy. The way you think about culture is that, given this position in the market place, what sort of culture and behaviour would make sense? If you are Wal-Mart and your philosophy is about having the lowest prices, then you want that mentality to permeate throughout the organisation. You want people to be very careful about cost in everything they do. You want the entire purchasing process to be affected by it. I don’t think we have any science for doing that but it is definitely important.
Another strategy we see a lot, and I think you are critical of, is outsourcing. What are your views on this?
I’m not critical of outsourcing in principle, but I am critical of the idea that outsourcing is always good. As with most things related to economics, there is an optimum, and that’s not a minimum or a maximum, but an optimum. What I’m critical of is that everyone seems to think you should do as much of it as you can, as opposed to finding the optimal mix. The optimal amount has probably gone up over the past 20 years as a result of technological changes. What should you outsource? Something that is involved in providing a service that is not integral to the technology of the product or service you provide. Having someone run your cafeteria is a no-brainer. Having someone manage your computers, to make sure they are operational, is fine.
Where we start to get in trouble is when we ask, “How many components should be made outside?” or “Should you have someone assemble your product?” My criteria is: how important is this to the essential design or performance of the product? Should you retain the skills that are involved in doing it versus whether you care if somebody else does it.
So you shouldn’t outsource core competencies where you have built your competitive advantage?
Right.
Your work suggests a big payback from knowledge about your company and your industry. I’m wondering how this applies with appointing a chief executive from outside the industry on the basis that he’s good at process or management or that he’s a people leader?
Having an outside person come in can often be very therapeutic because of their independence and lack of conventional wisdom, and the ability to look again at the business. This is as long as they are actually a student of strategic analysis and are willing to collect or do the homework required to dig in.
It’s interesting how often good strategies get created by outsiders because they are the ones who are less afflicted by the attitude of a process always having been done a certain way. But they’ve got to do a log of homework and make sure their idea works.
Another observation I’ve made is that many companies with really good strategies are reluctant to hire employees from within the industry. They find those employees are too set in their beliefs. They tend to hire people who haven’t been in the industry and train them in their way of doing things. I think that the downside of hiring the outsider is the sad version of what leaders do today, which is just cut costs, look for some things to get out of, and maybe do a merger or two, and then they feel like they’ve done their job as a leader.
You get short-term gains but what have you built?
Yes, and did you really have a strategy? I think there’ll be a chapter in my book on rearticulating what leaders do. What their real role is in strategy and how to play that role. I think we’ve lost that. Today, we have the charismatic leader who is the media star.
And the analysts love him.
Yes. You’ve got the cost-cutting restructuring leader, but there needs to be more attention on strategy.
Many people inside companies say the strategic planning process is disappointing. You end up arguing about budgets and who is spending what. Is that because that is not strategic planning?
Basically, yes. This distinction between strategy and operational improvement is very important and the operational stuff can be easily handled during the budgeting exercise, and it ought to be looked at on a yearly basis.
The strategic stuff does not need to happen every year; it needs an integrated process of looking at choices and tradeoffs. Strategic planning has a bad name. The systems that were created became ritualistic, and a buzz developed that strategy was not important. It was really execution. The emergence of Japanese companies got many people going in that direction.
It is quite interesting to see the ebb and flow of ideas about management; we do keep getting better and more professional. The strategy field is still relatively new. It was born in the late 1960s with Boston Consulting Group and that was the first systematic work on strategy. We’re maturing, hopefully. We’ve had some wake-up calls in the last three to five years, and I’m hopeful we will make progress.
Let’s talk about the Australian banking industry. Here is an industry where four competitors have 80 per cent of the market and they are almost indistinguishable. Given your views, do you think that this situation is sustainable?
What will have to happen is either somebody from within will move the industry in a new direction, by really having a strategy and making some choices, or the regulatory environment will be more open to foreign companies, or to new banks.
And the government is facing pressure to deregulate.
Exactly. My impression has been that it has been hard for non-Australian entities to be real banks, and to have the full range of services, so if that loosened up, that would be another dynamic. The best outcome would be for it to come from within, but that may be wishful thinking.
What motivates you? You’ve never gone into a senior management role with a major company.
I love the process of trying to figure out these very important problems. My work spans companies and economic development, and I see that economic prosperity is fundamental to society and human progress in almost everything.
I work directly on what creates prosperity but I am very clear in my own mind that at the root of prosperity in economies is good managers who make good choices, have strategies, and who compete in this way.
Everybody wants to feel that what they are doing is important. I feel it is important because if I can make a contribution to thought, about how to make societies and the companies in them more prosperous, then that is a big deal. I’ve been increasingly interested in the interface between capitalism and society and what role corporations play in improving economies. The circles are closing and I’m still very stimulated by research.
Does your work lead you to believe that economic value can be consistent with making a contribution to society?
Exactly. I fundamentally believe that there’s a deep integration between what most people argue is social values and economic values. The proof is the environment, and the next corporate philanthropy paper will be very focused on that issue. I do believe there can be a triple bottom line. You need to be very careful about how you think about that. I have a chart in the paper (Philanthropy’s New Agenda: Creating Value, HBR, Nov/Dec 1999) which compares social value and economic value. You can think about some things that are pure business, and there’s everything that you could do that is pure philanthropy, but I believe strongly that there’s a zone of things that do both.
For example, when you start investing in the development of a trading system in your location, you can be in this zone. I argue that if corporations are going to be involved in social things, they ought to be in this zone. As companies get involved in these things, there are principles about how you can add value in your philanthropy, beyond just the money.
You’re not talking about just donating to charity.
No, I’m talking about a more active role for the corporation and influencing those areas. Milton Friedman once said that the responsibility of a company is to increase its profit, and the company should not give; individuals should give. I look at the underlying assumptions that would make his argument correct or incorrect.
