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

 Strategic Thinking

COMPETING
COMPETING TO
TO BE
BE THE
THE COMPETING
COMPETING TO
TO BE
BE
BEST
BEST UNIQUE
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

 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

 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

 Shareholder Value Is Not The Goal

Superior
Superior Economic
Economic Shareholder
Shareholder Value
Value
Performance
Performance

• Sustained ROIC and • Stock Price

Growth

• 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

 Levels of Strategy

Competitive
Competitive or
or
Business
Business Strategy
Strategy

• How to compete in each distinct business or

industry

Corporate
Corporate or
or Portfolio
Portfolio Strategy
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

 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
Relative Position
Position
Industry
Industry Within
Within the
the
Structure
Structure Industry
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

 Disaggregating Economic Performance:
Industry vs. Position

35%
31.6%

30%
27.8%
Return on 25% ROIC = Earnings before
Invested interest and taxes
Capital divided by invested
1993-2007 20% capital less excess cash

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
 Understanding Industry Structure

Threat of Substitute
Products or Services

Bargaining Power Rivalry Among Bargaining Power

of Suppliers Existing of Buyers
Competitors

Threat of New
Entrants

20091017 – Turkcell (Strategy).ppt 9 Copyright 2009 © Professor Michael E. Porter

 Redefining Industry Competition

Zero
Zero Sum
Sum Positive
Positive Sum
Sum
Competition
Competition Competition
Competition

• Compete head to head • Compete on strategy

• One company’s gain • More than one
requires other companies company can be
loss successful
• Competition undermines • Competition expands
industry value the value pool

20091017 – Turkcell (Strategy).ppt 10 Copyright 2009 © Professor Michael E. Porter

 Positioning and Industry Structure
Heavy Trucks

Threat
Threat of
of Substitute
Substitute
Products
Products or
or
Services
Services
• Railroads
• Water transportation

Bargaining Rivalry
Rivalry Among
Among Bargaining
Bargaining Power
Power
Bargaining Power
Power
of Suppliers Existing
Existing of Buyers
of Buyers
of Suppliers
Competitors
Competitors
• Large independent • Heavy price • Large fleets
suppliers of engines competition on • Leasing companies
and drive train standardized models • Small fleets and owner
components operators
• Unionized labor
Threat
Threat of
of New
New
Entrants
Entrants

• Many truck producers

are assemblers

20091017 – Turkcell (Strategy).ppt 11 Copyright 2009 © Professor Michael E. Porter

 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

 Strategic Positioning
Economic Fundamentals

Differentiation
(Higher Price)

Competitive
Competitive
Advantage
Advantage

Lower Cost

20091017 – Turkcell (Strategy).ppt 13 Copyright 2009 © Professor Michael E. Porter

 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
g buyers are
Inbound Operations Outbound Marketing After-Sales i
willing to
Logistics Logistics & Sales Service pay
n
(e.g. Incoming (e.g. Assembly, (e.g. Order (e.g. Sales (e.g. Installation,
Material Component Processing, Force, Customer
Storage, Data Fabrication, Warehousing, Promotion, Support,
Collection, Branch Report Advertising, Complaint
Service, Operations) Preparation) Proposal Resolution,
Customer Writing, Web Repair)
Access) 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
 Achieving Superior Performance
Operational Effectiveness is Not Strategy

Operational Strategic
Effectiveness Positioning

• Assimilating, attaining, and • Creating a unique

extending best practices competitive position

Do the same thing better Do things differently to meet

different needs

20091017 – Turkcell (Strategy).ppt 15 Copyright 2009 © Professor Michael E. Porter

 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

 Strategic Positioning
IKEA, Sweden
Value
Value Proposition
Proposition
• Young, first time, or price-sensitive buyers
• Stylish, space efficient and scalable furniture
and accessories at very low price points.
20091017 – Turkcell (Strategy).ppt
Distinctive
Distinctive
Activities
Activities
• Modular, ready-to-assemble, easy to package
designs
• In-house design of all products
• 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
17 Copyright 2009 © Professor Michael E. Porter
 Defining the Value Proposition

What
What Which
Which
Customers?
Customers? Needs?
Needs?

• What end users? • Which products?

• What channels? • Which features?
• Which services?

What
What Relative
Relative
Price?
Price?

• Premium? Discount?

• A distinctive value proposition usually expands the market

20091017 – Turkcell (Strategy).ppt 18 Copyright 2009 © Professor Michael E. Porter

 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

 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

 Strategic Tradeoffs
IKEA, Sweden

IKEA
IKEA Typical
Typical Furniture
Furniture Retailer
Retailer

Product Product
• Low-priced, modular, ready-to-assemble • Higher priced, fully assembled products
designs
• No custom options • Customization of fabrics, colors, finishes,
and sizes
• Furniture design driven by cost, • Design driven by image, materials, varieties
manufacturing simplicity, and style

Value Chain Value Chain

• Centralized, in-house design of all products
• All styles on display in huge warehouse stores
• Large on-site inventories
• Limited sales help, but extensive customer
information
• Long hours of operation
• Source some or all lines from outside
suppliers
• Medium sized showrooms with limited
models on display
• Limited inventories / order with lead time
• Extensive sales assistance
• Traditional retail hours

20091017 – Turkcell (Strategy).ppt 21 Copyright 2009 © Professor Michael E. Porter

 Integrating the Value Chain
Zara Apparel
Word-
Word-of-
of- Cutting-
Cutting-
mouth Customers edge fashion
marketing chic but at moderate
and repeat cost-
cost- price and
buying conscious quality

Wide
range of Global
styles team of
trend-
spotters

Very
Majority of Advanced
Little media frequent
production production
advertising product
in Europe machinery
changes

Extensive
use of
Prime store store sales
locations in data
high traffic Very
areas Tight
flexible
coordination
JIT delivery with 20 production
wholly-owned system
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
 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
 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

 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
 Diversification in an Emerging Economy

Emerging Country Diversified Companies in

Business Groups Advanced Economies
Walt Disney
Hollywood
Pictures
Time
Sharing Miramax
Real
Estate Mickey’s Touchstone
Develop- Kitchen*
Computer
Computer ment Resort Motion
Wholesaler
Wholesaler Hotels Picture
Distribution
Cruise
Fast
FastFood Real
Food RealEstate
Estate Line
Family
Franchises
Franchises Services
Services Theme Motion
Parks Pictures
Financial
Financial Airline
Airline Tobacco
Tobacco
Services
Services Sports
Team Animated Traveling Multi-
Broadway Broadway
Feature Films Shows media
Imports/
Imports/ Food
Food
Productions
Productions
Theater
Distribution
Distribution Processing
Processing
Direct Consumer Television
Grocery
Grocery Marketing Products Program-
Hotel Textiles Disney ming
Hotel Stores Textiles Disney
Stores Records Channel

Industrial Retail Adult

Car
Car Industrial Stores Youth Cable
Dealership Parts
Parts Books and Channels
Dealership
Educational
Hollywood Materials
Records
Sugar
Sugar Television
Network
Hyperion
Books
Adult
Discover Publishing / Radio Televisi
Magazine Newspapers Stations on
Stations

20091017 – Turkcell (Strategy).ppt 26 Copyright 2009 © Professor Michael E. Porter

 Strategic Thinking at Turkish Companies

• Low Price • Superior Value

• Share of Market • Unique Position

• Product / Product • Customer Experience

Innovation • Total Customer Support

• Export Uniform Products • Locally-Tailored Regional

and Global Strategy

• Large Business Groups • Integrated Multi-Business

Companies

20091017 – Turkcell (Strategy).ppt 27 Copyright 2009 © Professor Michael E. Porter

 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

 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 29 Copyright 2009 © Professor Michael E. Porter