On Strategy, Implementation and Organization -- Michael Porter

Breaking the Code of Change II, Rotman School of Management, August 2-3, 2000

These participant's notes were created in real-time during the meeting, based on the speaker's presentation(s) and comments from the audience. These should not be viewed as official transcripts of the meeting, but only as an interpretation by a single individual. Lapses, grammatical errors, and typing mistakes may not have been corrected. Questions about content should be directed to the originator. These notes have been contributed by David Ing (daviding@systemicbusiness.org) at the IBM Advanced Business Institute ( http://www.ibm.com/abi).

Michael Porter, Harvard Business School

Have had many discussions with Chris Argyris.

Late entrant to the competition, thoughts on the way to a paper -- flexible in thinking, looking for thoughts.

• Have been interested in intersection between incentives, organization and strategy.

Meeting's broad issue: how organizations change or don't change.

• Not just a problem of organization change and knowledge.

• A lot of the problem lies in the strategy field, in how they conceive of strategy, and define it.
  • How they think about strategy, how they think about implementation.

Implicit problem definition: organizations don't change enough.

• However, an equal problem is that organizations change too much, i.e. they change in ways that are unproductive.

In many markets, see a problem of competitive convergence: companies start to look more alike.

• Then competition becomes destructive, because choice is reduced, then only differentiator is price, and then profits fall.

• Change is a self-inflicted wound.

Initially, conclusion in strategy was that most strategic failure was due to the environment.

• Now think that failures are self-inflicted, as companies choose strategies that reduce their competitive position.

Start with a definition of strategy.

• From Andrews' book:
  • Business strategy is the determination of how a company will compete in a given business and position itself against its competitors.

• Typically definition: a broad statement of principles or aims, doesn't say specifically what should do.
  • Strategy as grand design.

• Some definitions about where companies want to be: market share leader, #1 or #2.

• Some definitions on how the company is supposed to behave: e.g. innovator

• Strategy as actions: e.g. to consolidate the industry.

When strategy that way, everybody can agree on it, at that level.

• When you think about strategy this way, it is separate from implementation.

• These characteristics have created great problems.

• Need to take strategy to another level.

Any definition of strategy must link and become anchored in performance (goal).

• One step back from goal is profitability, either get price up or cost down.

Most actionable, observable thing is in what companies actually do.

• Value chain, set of discrete activities.

• Activities are narrower than functions, e.g. marketing or finance.

• They are the atomic unit (not particles) of the firm.

Raises capability, resources and competencies.

• Causing immense confusion in the field.

• See the firm as a collection of activities: asset stocks tied to activities.

• Problem is that people are making the direct connection from capability to success.

• Should see capability --> higher price or lower cost --> success.

• No capability or resource is value in and of itself; its only valuable if it's used in some way.
  • e.g. Walmart's locations are not valuable to someone else.
  • If you skip the activity part and say the resource is valuable, then missing.

Clarify what we're having problems with companies transforming properly.

• Two kinds of things that firms do:
  • Operational effectiveness: Good for any firm to do, e.g. managerial learning, things that represent best practices.
    • e.g. 2-d CAD system to 3-d CAD system to behavioural CAD system.
    • Firms do a lot of this, assimilating.
  • Strategic positioning: Not best practices, no universally good.
    • Strategy is the choice to do things are best practice for you, but are not best practice for other companies.
    • This means that this is about choice.

• Gravitational pull is from operational effectiveness towards strategic positioning, i.e. bringing in best practices into the strategy.

Issues with operational effectiveness, best practice improvement.

• Unlikely to lead to robust success, because everyone else is doing it.

• Half-life of advantage is shortening faster and faster.

• Observe competitive convergence: all competitors adopting the same best practices.

• Makes customers unhappy: homogenizing suppliers is not a good long-term idea.

• Need to recognize the necessity of best practice improvement, but need to create some room for other managerial behaviours, making and enforcing strategic choices.

Can't rely on a definition of strategy that is just grand design.

(Working on a book, was shooting for millennium, but not done).

Five characteristics:

• 1. Some difference in the desired mix of value that the firm desires to deliver.
  • This isn't best practice, which would mean one best mix of value.

• 2. Requires a different set of activities that produces a tailored set of activities.
  • If not a different set of activities, then competitor will copy.

e.g. Neutrogena soap:

• Mix of values: mild, residue-free soap formulated for pH balance.
  • Is this the best? No, it is a valuable kind of soap for a set of customers.
    • Don't try using Neutrogena if you're really dirty!

• Activities:
  • First you open the box, and then peel off the label.
    • If you didn't have the inner cover, then the soap would disappear.
    • Two level packaging therefore relates to a certain value.

Next characteristic of a strategy:

• 3. It has to involve tradeoffs, i.e. delivering one outcome is incompatible with some other outcome.

• e.g. Neutrogena:
  • Know deodorant desirable, but not going to do that.
  • Not in soap section, but drug section.

• Companies can't straddle: they have to choose one way or another.

Next:

• 4. Strategy has to involve some fit.
  • Can't be isolated, discrete activities, or the competitor could copy.
  • Fit, in the past, internal consistency matters.
    • How doing one activity impacts another activity.
    • Activities can be complements or substitutes.
    • e.g. Home Depot delivers large stacks of products to store, so they can skip warehouses.
    • e.g. Lowe's have big stores with normal ceilings and nice displays, more targeted towards fashion items for women and decorators, restocking at night so don't see pallet trucks, but then they need nearby warehouses.
    • These are activity systems: work with Nickolai S
  • Some fit is best practice, some fit is strategy-specific.

How constant or changing should strategy be?

• School of thought: since the world is changing, the strategy needs to change, can't have a fixed strategy.
  • Strategy for Dell hasn't changed over time, most changes are best practice.
  • Reuter used to deliver using carrier pigeons, not Internet: this doesn't change the purpose of the enterprise.

Question distinction between strategy and implementation:

• A nest of choices, at an activity level.

• Boundary is shifting, to push implementation all the way down through activities.

• This should make strategy easier to implement.

Org effectiveness vs. strategy:

• Some striking differences.

• OE:
  • All valid best practices are desirable, no tradeoffs,
  • Control: can be delegated, easy to measure (lots of external benchmarks)
  • Incentives: can be tied to individual and workgroup performance, reinforced by professional standards (e.g. feel like a marketer, read marketing journals).

• Strategy:
  • About choice; changes (but only those that fit); tradeoffs, interdependent choices (not incremental)
  • Control: hard to delegate (because they need to be done simultaneously); hard to measure, no peers (particularly within an industry)
  • Incentives become complicated, because one functional group has a lot to do with another functional group.
    • A hard problem to solve (for Mike Jensen!)

• Gravitational pull towards OE.
  • If you do what competitors do, you will do well.

• Changing strategy is hard: undoing a hard system. (Look at Jan Rifkin's work).

Problem of too much change or hard change.

Chandler et al. says set strategy, which determines structure, then get feedback.

• Feedback that structure is inappropriate.

• However, another feedback loop other than this?

Tell managers:

• Need to separate OE agenda and strategy agenda.
  • In all discussion, need to note which one we're talking about.

• Need to create a more complete definition of strategy, beyond grand design.

This suggests (in discussions with Chris Argyris) need for very deep dialogue in the creation of strategy.

• Need to communicate strategy choices.

• Not pronouncement meetings.

CEO: people coming at you all of the time with proposals.

• Proposals get sorted into three bins:
  • This looked like a best practice, but it wasn't, is rejected.
  • It's a best practice, just do it.
  • This looks like good for us
  • This looks good for our competitor, but not for us.

Question from Michael Beer: The desire to grow causes managers not to make choices: seduced into larger value.

• Article: The Growth Trap.

• Strategy works well in transformations, not in incrementalism, resulting from the discipline of capital markets.

Question: Companies don't have the right strategy, and then converge.

Comment from Mike Jensen: This is the best discussion of strategy he's heard. Distinguishes between OE and strategy. That which is undistinguished, runs us. This will have to separated in incentives and motivations. Will need to fire the HR department, because they don't distinguish.

Comment: The practice of strategy is a problem. There are few people at the top, and then it doesn't mean much to anyone below.

• Beginning was in strategic planning, not strategy.
  • Then process of strategy, and this was thrown out.

Comment: Institutional identity: creating identity around the firm, losing it around the profession.

• Recently did a case on Edward Jones: people know what the tradeoffs are.
  • CEO can write documents saying what they are and they aren't.

Comment: Mobilization and campaigns -- what is the role of leaders. What is the nature of strategic conversations?

Question from Amy: The distinction between OE and strategy, e.g. Toyota's manufacturing system.

• Some of these distinctions are hard, and go across multiple activities.

Question from Amy: Not only increasing price but decreasing price strategies?

Question: As opposed to moving strategy --> implementation line right (which is push), could move the line the other direction (which is pull).

• Strategy needs to involve a lot of people, or it won't serve its purpose.

• How many people to involve? Good question.

Comment from Jan to Mike Jensen: Companies need to pursue both OE and strategy, but this isn't two direction

• Mike Jensen: No problem, organizations are muddy.

• Jan: Need to aware people for new strategy, as well as rewarding them for executing on best practices?

David Miron: When consultants get called into e-business strategy, have a number of different initiatives of which one is an e-business management system, which is a different way to go about this.

• e.g. Cathay Pacific decides that Delta Airlines is best practice, but others different?

• This lasts for one year.

• What happens after the year?

Cliff: Who caused Nortel to make the right-turn change to the Internet when Lucent didn't? Frequency of changes. How often does an organization really make a big change?

• Mike Beer: Make distinction between operational effectiveness and organizational effectiveness.
  • There is a universal capability that is distinctive: to create an organizational conversation about a context to create and discuss strategy, which involves as dialogue (as discussed with Chris Argyris).
  • This is almost universally wrong: executives talk about the wrong thing.

Discussant: Mike Moldveanu

Five step argument:

• 1. We don't make choices -- incoherent

• 2. Firms appropriating behaviours, rather than inputs.

• 3. Distinguish between operational effectiveness and strategic effectiveness.

• 4. Tension (which Jan brought up): continuity and discontinuity in strategy
  • When do you change a strategy?
    • Strategy is like a scientific theory: choices on acceptance on refutations, and choices whether to let go of a theory.
    • Theory needs to be absorptive, but not completely absorptive:
    • Freud: my theory can explain everything; Popper: that's the problem.

Comment from Chris Argyris: How would compose this as a proposition, so it would be disconfirmable? If they understand, will measures fall out? Pain avoidance mechanisms are difficult.

• Mike Porter: Proposition: If they have a strategy, they will do better?

• Mike Jensen: If they fire the HR department, they will be better off.

Comment from Larry: On pain avoidance, Archie Norman introduced a counter-structure, a separate organizational system, that he used to attack the organization with, mobilizing people in the trenches, with affective meetings where people can close to blows. "Walking the Plank". Case by Michael Beer on ASDA.

Comment: Trying to tie together. If there is convergence around strategy, this suggests a need for companies to select more differentiated strategies. However, differentiated strategies don't work unless there's fit, which is difficult in itself. NP-hard problems, rather than P-hard.

• Mike Moldoveanu: Fit is a combinational problem.

Roger Martin: Swedish psychologist: people prefer reliability (replicable over and over again) or validity (outcome they seek come true), and trade these off. A reliability person would love OE. Capital markets love reliable companies. Nortel has been hammered for every strategic change in capital markets, and then afterwards, they think that it's a good idea. Can't prove ex ante that these will be a good idea.

Russell: More strategic choice or less strategic choice?

• Mike Porter: Shouldn't do a whole new pattern of choices very often.

• Roger Martin: Should only do this when there's a huge fault line emerging.

Michael Jensen: Capital market efficiency doesn't mean that they're always right, but they're the best estimate. Problem is executives listen to what analysts (particularly sell-side) say on what the effect will be. Need to understand that for any courageous direction, the markets will react negatively. Analysts don't know what creates value, they just know how to measure it afterwards.

Michael Jensen: Can't have the same measurement system for a new strategy, where the new people aren't into the company, yet. For dot-coms, need to revised reward measures for people to creating things that the stock market is already set.

Chris Argyris: Clay Christensen wrote about disruptive innovations, and have tested it. Mike and Jan say that they've taught a course where they found it wasn't true. What's different.

• Mike Porter: Need to go to the next level.