Michael Porter

Many business leaders think that their job is to be the best at what their company does – to be the best toothpaste company or the best bank. But this focus on operational effectiveness is not the key to thinking strategically, argues Michel Porter, a Harvard Business School professor.

Instead, he noted this month when speaking at The University of North Carolina at Chapel Hill, business leaders should strive to compete on providing unique value to a group of customers. Porter, who spoke as part of the Chancellor’s Speaker Series, is also director of Harvard’s Institute for Strategy and Competitiveness and the author of 18 books.

"The idea that there is one best way to compete is a very dangerous way of thinking,"Porter said. "You end up not having anything unique about what you do. That gets companies tangled up in the tar baby of bad strategic thinking."

For companies to tap the best way to provide unique value they need to understand their own business model and the structure of their specific industry, he added. For example, he noted that in the heavy truck industry large independent suppliers of engines and unionized labor make it hard to compete.

However, Paccar Inc. has been successful in an unattractive industry, Porter noted. Paccar manufactures Kenworth and Peterbilt trucks; it has aimed its business at those drivers who own and operate their own trucks. The company has been successful selling leather seats, flat screen televisions and surround sound, he noted.

"Paccar decided that in this somewhat ugly industry structure they had to get away from the really powerful customer," he noted. "[Owner-operators] don’t buy on price. They want the fancy paint job. Paccar has created enormous value deciding who their customer is and creating value that that customer is willing to pay for."

Porter noted that organizations with an effective strategy have:

• A unique value proposition compared to other companies
• A tailored value chain
• Clear trade-offs in their business model
• Activities in the value chain that fit together and reinforce each other
• Continuity and steady improvement

Trade-offs often trip up those seeking to formulate a strategy along the path Porter advocates. For example, he noted that while he does not like IKEA, his college-aged daughter is a big fan of the furniture store. While IKEA may not offer lots of sales help in their stores that may appeal to him, they do offer clever modules of furniture and prices that appeal to the college crowd, he noted.

"This is about trade-offs - it is about not trying to meet the needs of every customer," Porter said.

He warned that the capital markets can be toxic for this type of competitive strategy. Executives should be prepared to stand up to pressure from investment analysts and others who are questioning why the company is not using a tactic its competitors have in place. Moreover, business leaders should make achieving a superior return on capital their primary goal as they form a competitive strategy. "Good strategy always starts with real clarity about the goal," he added. "Growth is only good if you’re earning good return on capital."