Michael Porter - Estratégia Competitiva (1/2)

[Music] welcome to the Harvard Business School video series in this program Professor Michael Porter of the Harvard Business School introduced es industry analysis and discusses how to position a company within its industry and how to create an effective strategic planning process a leading Authority on strategy Porter is the author of competitive strategy competitive advantage and competition in global Industries for suggestions on how best to use this video cassette and accompanying material please refer to the viewers guide and the users manual in your video package I'm Michael Porter and this is my Harvard Business School classroom

where I teach about competitive strategy some of you may be very familiar with my ideas on strategy and others of you may be just learning about the subject it's a complicated subject here at Harvard I spend about 50 sessions covering strategy with my MBA students and clearly we're not going to be able in a short program like this to cover everything in this subject but we've got on our side a very powerful tool and that's the power of the video medium through this medium I hope I'm going to be able to give you some of

the essential concepts of developing strategy but more importantly to take you behind the scenes in a series of Industries and important American companies to bring the concepts of strategy to life and in the course of talking to the executives involved and and seeing strategy in action uh we can learn some lessons about strategy that are hard to learn uh any other way way what is competitive strategy competitive strategy is the positioning of a company in its competitive environment now positioning means more than just product positioning or the marketing concept it's the total positioning of the

company involving all the functions production distribution Logistics service the total picture of the Enterprise is placing to the competitive environment now how do we go about developing a strategy well in developing a strategy there are two fundamental questions that we've got to address the first is the structure or attractiveness of the industry or Industries in which we're competing some Industries are a lot more profitable than others year in and year out and we simply must understand why because one of the essential parts of developing a strategy is to know how good the game is in

which you're trying to compete the second essential question in strategy is a company's position within its industry again if we look at many Industries we see that no matter whether the industry profits are high or low companies in the same business have widely different levels of profitability some year in and year out make a lot more money than others and any strategist must understand what it takes to be a superior performer in the industry and not be one of the ones that's below average both of these questions are vital in developing strategy now let's turn

to the first question industry analysis in any industry no matter what it produces whether it's a product or service or of any type there are five basic forces of competition at work that are Illustrated on this chart the force in the middle is the one we most commonly think about the Rivalry among the existing competitors the jockeying for position price Cuts new product introductions new capacity that sort of thing in some Industries rivalry is very gentlemanly and and gential uh in other Industries rivalry is Cutthroat somebody's always attacking the other guy and as we'll see

later this is not an accident now this diagram however suggests that industry competition is broader than just the Rivalry among the existing competitors there's the threat of new entry the threat that new competitors can come into the game and they bring in new capacity and if entry is easy if it's easy for new players to come into the industry that's going to erode the fundamental attractiveness of the industry so one crucial dimension of Industry structure is the barriers to entry Industries also compete with substitute products or Services these are other products or services that can

do the same thing as the industry's product so for example if you're selling Steel you're worried about Plastics and other materials because they're substitutes for what your industry produces if an industry faces close substitutes this places a cap or a constraint on prices in the industry you can only raise your prices so much or you'll start to erode the volume as the buyer deserts you to the substitute you're always buying from suppliers in any industry you're buying inputs like labor materials and Machinery to the extent that suppliers have bargaining power they can constru the profitability

of an industry because they can by bidding up their own prices uh Force the industry to absorb costs that it can't pass on and turn to its own buyers they can strip the profitability of an industry and finally of course every industry sells to buyers and those buyers may or may not have bargaining power if they have bargaining power and if they're price sensitive they may bargain away uh the profitability of the industry by demanding lower prices by expecting more service that they don't pay for and so so on so what we see is that

in any business the fundamental long-term profit potential is a function of the strength of these five competitive forces the mix of forces will depend on the industry every industry is unique but the overall strength of the five forces is going to determine whether an industry is a profitable one in the long term or one that's mediocre now what determines the strength of each of the competitive forces whether it be rivalry or buyer power or supplier power or whatever each of the competitive forces is shaped by a number of underlying structural determinants in the case of

rivalry it's things like how fast the industry is growing how high are the fixed costs how much can you differentiate yourself from your Rivals these underlying determinants of each Force are described in detail in your users's guide they represent the raw material that you use to conduct industry analysis to bring these ideas to life let's take a look at a number of specific Industries and see if we can't use this framework to assess their fundamental potential and how it might be changing pharmaceutical industry is an 80 billion industry worldwide and it's one of the most

profitable industries of any industry in the economy of any country the average after tax return on equity in the pharmaceutical industry has been around 20% for the long as long as anybody can remember and very few companies have ever have a bad year now why is the pharmaceutical industry such a profitable business why is this such a terrific game to be in well to answer that question let's go back to our five competitive forces let's start with a buyer there are three different buyers of drugs but neither the doctor who chooses the drug the patient

who wants to feel better or the insurance plan that pays most of the cost are price Cent posi now let's turn from the buyer to the barriers to entry into the industry how hard is it to get into the pharmaceutical industry well the answer is it's darn hard for two important reasons the first is that in order to get your drug accepted by the doctor you've got to have a thousands of salespeople they're called detail men in this industry and they call on the doctor and tell that doctor about new drugs and try to persuade

the doctor to try the drug out on his or her patients and it's very very expensive to set up one of these organizations and the doctor is very busy in addition to a Salesforce you need to actually come up with a new drug you need something uh Innovative to sell to that doctor and the average cost of developing a new drug today is about $100 million $100 million just to get into the game and about 60 million of that is the cost of testing the drug to get it approved by the government and that takes

years in fact there's not not been a significant new entrance into the pharmaceutical industry since the 1950s when synex entered on the back of their breakthrough and contraceptive uh pills suppliers have little power in this industry the cost of purchase ingredients used in making a drug is a small percentage of total cost most ingredients are Commodities where suppliers have little room to raise prices there are also few substitutes once an effective drug is on the market it takes years for another therapy to make Headway against it now how about the process of competitive rivalry in

the drug industry well the process is pretty ginly in this industry drug companies don't compete on price they don't compete on price because they don't have to the buyer isn't price sensitive they are able to hold up the prices and compete instead on things like their brand reputation uh the quality of their Salesforce things that don't erode the profitability of the industry so the pharmaceutical industry is what you might call a festar industry every one of the five competitive forces is favorable let's turn to another industry the airline industry with a very different level of

performance for much of the postor War II period the airline industry has been regulated both in the United States and in many foreign countries and this industry illustrates very well how how government can fundamentally affect the structure of an industry now how do we think about the role of government in Industry competition it's tempting to view government as the sixth force uh to add to the other five but from our experience that's not the best way to look at it the best way to look at it is to see how government is affecting the other

five and by affecting each of the other five forces government can either be a positive or A negative for industry competition now let's look at Airlines under regulation government suspended the structure of the airline industry prices were fixed offsetting any power of the customer Airlines were not allowed to enter new routes uh nullifying rivalry and new Airlines were not really allowed into the industry in effect uh making the barriers to entry unbelievably High under regulation the airline industry profitability was reasonably good but deregulation unleashed the fundamental structure of the airline industry and has set in

motion a set of forces that have led to very mediocre returns uh since since deregulation took place now bearish entry are very low all you need is a few planes and you can enter two or three cities and you've got yourself an airline and in fact dozens of Airlines have entered the industry as soon as it was allowed by government the buyer is pretty price sensitive and is not very loyal uh how long will you wait for uh the airline of choice 15 minutes 20 minutes customers are willing to switch from one airline to another

based on who's convenient who has the best price rivalry is intense you have lots and lots of competitors with different cost structures with very high fixed cost once you've got an airline fueled and you're going to make the trip anyway you will cut price to get those incremental passengers and suppliers to the airline industry have some clout too in in in aircraft and some other key inputs to the industry so once government gets out of the airline industry structure the underlying structure goes to work and that structure is not very favorable and the profits reflect

that now we've seen how to analyze an industry by looking at the five forces and we've seen how some Industries are fundamentally more attractive than others and profitability reflects that but Industries are not sta industry structure can change it can change either For Better or For Worse for two basic reasons first environmental forces like new technology can shift the structure of the industry and companies through their own strategies also have the power to shape industry structure how do we analyze industry structural change well once again we use the five forces an industry Trend or a

competitor development is significant for for future industry structure if it affects one or more of the five forces now to understand how this works let's go back to the pharmaceutical industry that gold mine I talked about earlier in the pharmaceutical industry there are three important changes that threaten to undermine that tremendous profitability of the industry the first has to do with the buyer remember that buyer who didn't care about price well that's starting to change there's increasing pressure on cost control it's coming from the government it's coming from the insurance companies it's coming because the

cost of drugs has increased twice as fast as the Consumer Price Index in the 1980s now this increasing pressure for cost control is leading to the second important change in the industry and that's the emergence of so-called generic drugs uh one of these babies a generic drug doesn't have the brand name of the manufacturer but has the identical chemical composition it's therapeutically equivalent and once a drug goes off of patent as many have uh it's legally possible for the drug to be imitated by another manufacturer now increasingly the government is legislating that doctors have to

prescribe a generic not the brand name of the manufacturer the third important change in the pharmaceutical industry is the emergence of biotechnology now biotechnology is a whole new way of doing research on drugs but let's think about the impact of biotechnology on the structure of the pharmaceutical industry it's doing a couple of things first of all it's reducing the cost of developing new drugs lowering the beared entry and in the process whole new companies like Genentech with entirely new skills have an opportunity to enter this industry for the first time in decades now these three

changes Cost Containment generic drugs and biotechnology are all undermining the structure of the pharmaceutical industry and unless drug companies can react or respond the average profitability of that industry is likely to go down but it doesn't always work that way in some Industries structural change is positive now let's return to the airlite industry and discussed three important changes that are occurring in that industry that have the promise to fundamentally improve the industry that's been so difficult and so competitive for the last decade the first important change is the so-called Hub and spoke route system now

by having a lot of flights coming in and out of the same city every day in a very coordinated way an airline could get major efficiencies in operations in marketing and number of other aspects of the business the effect of the Hub and spoke system was that Airlines have started to compete on the basis of hubs not on every individual flight and this has also raised the barriers to entry into the airline industry to get into a city now you have to offer enough flights to compete with that Airline who has that city as a

hub another Force changing the airline industry is the emergence of sophisticated management information systems an airline is involved in hundreds of millions of transactions every day fairs schedules tickets and modern computer technology has revolutionized the way all this can be done it's allowed it to be automated the problem though is that it takes millions and if not hundreds of millions of dollars for an airline to develop this kind of sophisticated technology and this huge investment has substantially raised the barriers to entry into this industry and given a new lever for some Airlines to outdo others

the final change in the airline industry that's going to improve the industry structure is the so-called frequent traveler programs where Airlines give free travel to passengers who accumulate miles on their Airline now what what are the airlines trying to do with frequent traveler programs you'll remember that one of the crucial problems in the industry is that it was hard to differentiate one Airline was perceived as the same as another well the frequent traveler programs have started to change that equation and in the process again rivalry is starting to get less intense and the barriers to

entry are going up now we've seen a number of Industry examples spanning very different types of Industries what should we have learned about industry analysis well first of all we should have learned that industry analysis is the starting point of any strategy you simply must understand the structure of each and every industry in which you're competing and the underlying reasons why that structure is what it is each industry is going to be different in terms of which competitive force is the most significant and sometimes it's the buyer sometimes it's barriers to entry sometimes it's rivalry

But whichever force is most significant that's the place where strategic attention really needs to be placed that's where you should focus your creative energies in trying to improve your environment another crucial lesson in Industry analysis is that you must constantly be looking for how your industry might change because we've seen in Airlines and pharmaceuticals how important and even revolutionary industry structural change might be and we've seen how to use the five forces framework to analyze how your industry might indeed be changing we've also seen however that companies have the power to shape their industry you're

not a passive participant in your industry you can influence how industry structure evolves and an essential part of any company strategy must be an approach to making the industry structure better particularly if a company is a leading company but the final lesson is that there's a flip side of all this and that is that companies can unwittingly destroy their industry just as easily as they can make it better many companies by not thinking through the implications of their strategic moves will go down a strategic path that undermines the industry structure that makes the five forces

worse any strategic move of any sort must constantly be tested against its impact on the fundamental structure we've looked at how to analyze an industry the first essential question in strategy now let's turn to the second question how does a company achieves Superior performance within its industry whatever the average industry profitability may be now the starting point for understanding why a company is a superior performer is pretty simple that is that to be a superior performer in your industry you've got to have a sustainable competitive Advantage a company has to have something it can do

better than its Rivals that it can protect from imitation it can keep keep its competitors from replicating now Advantage can be sustained in one of two ways either you can be lucky enough to come up with something that your competitors can't ever copy which is rare or more commonly you can improve faster than your competitors can catch up and continuous Improvement and continuous search for new uh benefits and edges is really part and parcel to most successful company's ability to sustain Advantage now now if competitive Advantage is the key to Superior performance how do we

get one well to understand that question we must recognize that there are two basic types of competitive advantage that any company can possess one is low cost the company can be lower cost in designing and producing and delivering and marketing its products than its competitors it has lower costs and therefore it can earn Superior margins and therefore Superior performance now the other kind of competitive Advantage is what I like to call differentiation a company that's differentiated is able to provide some kind of unique benefit that its customer thinks is important and because it's Unique in

an important area its customer is willing to pay at a premium price and that premium price leads to Superior margins and in turn Superior performance now if we think about it almost any strength or any weakness that a company has can be translated either into something that makes their relative cost position high or low or something that affects their ability to be differentiated relative to their competitors and as we'll see later it's very important to understand which one a company is trying to achieve now in seeking one of these two types of competitive Advantage any

company has another fundamental choice to make in setting its strategy and that's what I like to call competitive scope the breadth of the target within which it's seeking to gain that Advantage now some companies like General Motors historically in the automobile industry have picked a broad competitive scope they've they've offered a wide range of products to a wide range of customers in a wide range of geographic markets other companies recognize that they can't achieve competitive Advantage with a broad range of consumers or in a broad range of product lines and therefore they pick what I

would call a narrow scope focusing on a particular product line a particular type of customer a particular type of geographic area perhaps and they seek to gain advantage in this narrow Arena even though they can't achieve it overall now these two essential variables the type of advantage and the scope of Advantage lead to what I like to call generic strategies some fundamentally different routes to competitive advantage that companies can choose now as you see in this chart uh there are four basic options a company can seek broad positioning and to be the lowcost producer or

it can seek abroad positioning and try to differentiate itself with that wide range of customers and segments and so on or it can choose a focus strategy by narrowing its Target to some unusual segment and seeking to be either lowc cost or differentiated in that particular area even though it can't achieve those advantages over overall what we learn from studying a wide range of Industries is that the worst strategic error is to be stuck in the middle to not be willing to choose which of these routes to competitive Advantage the company is going to follow

to worry about quality and differentiation but not achieve uniqueness in anything and to think about segmentation of the market but to not be willing to dedicate themselves to a particular narrow segment these kind of companies are stuck in the middle and they're going to be the below average performers in any industry any company seeking to gain a cost Advantage must start with a good product a lowcost strategy starts with a good product it starts with a product that's acceptable in quality that's acceptable in features that meets the basic needs of the consumer but the lowcost

competitor doesn't offer all the Frills and all the bells and all the whistles that they potentially could they seek simply to produce a good basic product instead of Frills their advantage is going to come from opening up a significant and a sustainable cost Gap over all their competitors and they do this by managing the critical drivers of cost in their business whatever they may be now in gaining this lowc cost position the cost leader translates this into Superior margins provided they can command prices that are at or near the industry average in strategy there's a

very important equation which determines uh fundamentally a company's ability to be a superior performer and that equation is the comparison of a company's prices relative to its competitors and its cost position relative to competitors any company that's a superior performer either has higher prices or lower costs but there's a balance to be struck in a cost leadership strategy a company is trying to be the lowcost producer and get a cost advantage that's where its Advantage is going to come from but it must not let its prices get too low or its cost Advantage will be

nullified or offset by lower prices now let's look at two companies that have successfully implemented cost-based strategies every one of us uses bar soap hopefully every day that's why it's a $ 1.6 billion doll industry in the United States when one thinks of soap one thinks of one company Proctor and Gamble when one thinks of Proctor and Gamble one thinks of one's soap ivory one might think soap is a mundane business where there's little opportunity for strategy after all soap is soap uh in fact soap provides a fascinating example of competitive positioning Ivory was introduced

uh many years ago actually in 1879 um at the time there were over 300 companies in the soap industry uh most of these companies competed with a strategy of producing very scude soaps the other competitors in the soap industry at the time were producers of very expensive luxury soaps now Ivory decided to enter the market with a very different strategy uh for the time the basic Ivory strategy was to introduce a pure mild bar of soap uh without the harsh ingredients and alkalis that were characteristic of the other soaps of the time the Ivory bar

also floated interestingly enough though the floating was an accident uh Ivory uh made some bars up by accident in the manufacturing process and it turned out that they floated consumers were so interested in that feature that Proctor and Gamble quickly uh decided that it was a good idea in addition to the product itself however Ivory created some very important symbols of its strategy the first was whiteness at the time most soaps were brown in color various shades of brown Ivory in dead became uh the white soap Ivory was the first heavily advertised soap in fact

one of the first heavily advertised brands in the United States of any kind in addition to the advertising though was the advertising message Harley Proctor had a very interesting idea he had the problem of communicating Purity and there was no well-established standards for Purity in the consumer's mind so Harley Proctor designed his own measure of Purity uh which led to the famous slogan 99 and 44 100% pure uh this became the uh slogan that personified the ivory brand once Harley Proctor had created this measure of Purity he aggressively used comparison ads with other soaps in

fact tables appeared in magazines which compared Ivory to other brands later on he started very early to use endorsements uh he had chemists and Physicians certified to the purity of the ivory brand the final early innovation in Proctor and Gamble advertising was the use of the image of the baby the baby became one of the early symbols of ivory mild if it's mild enough for the baby it's got to be mild enough for you the results of the ivory strategy were astounding Ivory became the differentiated soap in the United States it commanded a premium price

and it also commanded a leading share of the soap Market uh dominating all other competitors Ivory pursued its differentiation strategy up through the 1940s and 1950s but important changes in the industry in the 1950s and 1960s were threatening and challenging the traditional Ivory strategy the first was Dial Dial was the first of the so-called deodorant bars in addition to basic cleaning it offered a deodorizing feature as well a number of other deodorant bars followed the second major development was Dove Dove was specially formulated to uh take good care of the skin so-called Beauty Bar Dove

was introduced in 1956 and again others followed now the introduction of dial and Dove fundamentally threatened the positioning of ivory as the differentiated soap these new products had features that Ivory didn't have now Proctor and Gamble had a choice at this stage it could have added these new features one or both of them to Ivory but it chose not to instead Proctor and Gamble decided to strategically reposition Ivory now the basic Ivory bar remained the same it's white it floats it's 99 44 100% pure but Ivory move from being the differentiated soap to being the

good basic soap that represents a good value it moved from being the differentiator to being the cost leader in the soap industry and in the process Ivory was able to maintain its leading Market position now what is the new Ivory strategy well let's start with the bar the ivory strategy is to have a simple basic No Frill soap no unnecessary ingredients no scents no perfumes now how about the packaging well as you can see here the ivory package aims for Simplicity there's no expensive papers no shiny paper no garish colors uh look at this this

bar here uh that's pretty garish uh Ivory goes for Simplicity for simple uh for uh uh basic now in terms of packaging I've rep pioneered a practice in the industry called bundling here's an example of a bundle of soap there there are six bars here sold together and what this did was go from having a bunch of bars uh sitting in the bin in a disarray to a neat kind of package and the idea here was that Ivory could be used by the whole family so you should buy it in quantity the user for Ivory

is a remarkably diverse consumer base um there is no uh no meaningful demographic skew on Ivory is you might expect with the brand of that kind of market share and Broad usage it is um it is welldeveloped amongst females adult males U children and infants um for many many purposes ranging from face to hands bath shower and um that is really one of the things that makes Ivory unique when we sit down with consumers we give them an array of 30 or 40 uh available brands and ask them to Cluster them as as they see

the the brands clustering uh Ivory always sits out by itself and and that's one of the things that distinguishes it is it's it's really allpurpose uh versatility Ivory's pricing changed to reflect its fundamental shift in strategy instead of pricing it a premium Ivory set its prices lower than its major differentiated competitors the final aspect of ivory strategy was advertising and ivory advertising again stressed this theme of Simplicity a basic soap for the whole family nothing more nothing less I know I'm new but this price can't be right what's wrong Ivory costs less than just about

all the other soaps in the store it usually does I can't believe a grap soap like Ivory costs less I mean that rich lather and natural kind of clean in fact four bars of ivory usually cost less than three of most others I thought they charge more for a great soap like Ivory they probably should you'd expect to pay more for Ivory but isn't it nice you don't have to we've seen the new Ivory strategy now what makes Ivory low cost well let's look at a number of the most important elements let's start with the

air bubbles the air bubbles in the ivory product inherently reduce the amount of material required to manufacture an ivory bar the lack of expensive additives like deodorants or beauty features also make the bar inherently less expensive the simple packaging with no shiny uh materials or expensive papers are inherently cheaper to produce and ivory because of its long consistent brand image controls advertising cost now the brand image in addition to the fact that Ivory is such a good value because of its lower price means that Ivory is a very effective traffic builder for the retail story

and that means that Ivory uh has to spend Less on trade promotion than many of its competitors do when you add to this that that Proctor and Gamble gets other cost advantages through scale and things like purchasing and distribution all this means that Ivory has a substantial cost advantage over many of its competitors Ivory charges a lower price but its cost because of the strategy is even lower and the result is a very profitable business the Intriguing thing about the ivory Strat stry is it makes many of these cost savings into a virtue now if

we step back from the soap competition that I've described I think we can get some insight into how various strategies play against each other in the industry now we can see from the diagram that Ivory competes with just about everybody it competes with dial and Dove for the more quality sensitive consumers it competes with the no-name brands for the very price sensitive consumer it doesn't compete however very much with the Exotic Brands because they're really targeting a totally different part of the market but despite Ivory's success the soap business isn't standing still it's always changing

the latest interesting development in the industry is this product here it's a new soap called Pure and natural does that remind you a little bit of ivory in most companies old Brands sort of get left alone to kind of fade away but that hasn't happened at Ivory why not why the continual Improvement well Ivory really became a gigantic brand to us very quickly it was really part of Americana before the end of the 19th century it was the leading brand and it wasn't very difficult in those circumstances to realize the importance of keeping it up

to date in terms of what consumers wanted and also to recognize the very particular characteristics it had of Purity and mildness floated was white so the fact that um it was of such gigantic importance to the company there were many people in those days that called proor and gamble the ivory company so the whole idea of maturity is sort of a misnomer isn't it totally misnomer the idea that there is some product life cycle which you'll sometimes hear talked about that you're destined somehow to go up and then start to come down is totally an

issue that's in the control of the people managing the business you mentioned earlier that it's the sort of key first step is really being in touch with the consumer and what that consumer really wants at a very personal level you know how do you and the other Proctor and Gamble Executives actually do that how do you how do you how do you understand the consumer you just can't kind of think about it you've got to get more input than that how do you do it you've got got to sit down and talk to Consumers um

and there are a whole variet and you need to do it in a whole variety of ways uh uh you can get benefit from talking to a group of consumers um at one place and uh and I do that every time we've introduced a major new brand since I've been president of this company and I certainly did it before I will find an opportunity to get out into the test market and I want to look at stores but I also want to sit down in a room with consumers and hear them talk about the brand

we've talked a lot about the change it Ivory but you've already hinted at the continuity despite over a 100 Years of History here's a brand where certain essential elements have been preserved how do you actually preserve continuity as people change as time changes what process do you use to do that well there's several as you'd expect um one uh one one is simply uh the continuity of our own uh management uh we promote from within Without Really any exception uh we know each other awfully well the uh people who've been responsible for Ivory over the

last all 30 35 years are all still in this company now they're not all on working on Ivory every day or every week or even every year but they are here the point of continuity too I would also uh stress is importantly related to our advertising agencies and our attitude toward our advertising agencies our relationships uh with agencies are ones that are very long lasting for us and uh again Ivory is a marvelous example of that we have we have been working with the same Agency on Ivory for 67 years John what does a brand

mean at Proctor and Gamble well we think of a brand as it's almost a lie that may sound corny to say that but it it becomes almost a person uh begins uh it's first and foremost something that we see bringing benefits to to Consumers and that's the way we really view what we're about as bringing benefits to the consumers H but it it assumes a personality almost a character to it now as we look over the history of of the bar soap category and the history of ivory we see a succession of new segments opening

up and new competitors coming on the scene uh dial uh Dove other other products Now by and large Proctor and Gamble in dealing with those changes has chosen not to kind of change Ivory but rather to introduce new brands why is that why not just create a a new model of ivory why why introduce a whole new brand these have been very difficult challenging decisions each one of those you mentioned should we make Ivory a deodorant bar should we add Cold Cream or some other cosmetic ingredient to I believe me uh as I answer this

don't let me leave you with the impression that the answer was obvious or we didn't go back and forth in the thinking process on it we did and on each and every one of them um but in each one of them too we felt that the right way to proceed was to introduce a different brand to provide that benefit because we felt that adding deodorants to Ivory or adding a cold cream ingredient to Ivory would really be inconsistent with um one of the basic features qualities attributes that consumers wanted and because we felt that the

values that Ivory did stand for uh as it was were still of such broad appeal and Broad interest to Consumers that uh we would be able to have a healthy and if we operated it property a growing business without having those ingredients so we felt we ought to leave Ivory in that sense the way it was that is not containing these ingredients and not providing those particular benefits and do them on another brand now we've seen and heard the iory story a classic story in American industry what lessons does the ivory story hold for strategy

well I think it holds lessons at two different levels for strategy in general as well as how to compete with a lowcost strategy the soap industry illustrates how a number of companies can successfully compete in the same industry provided they choose different strategies Ivory has been successful dial has been successful Dove has been successful they're all choosing different positions in the marketplace but me too strategies rarely succeed we've never heard of most of the other soap brands that tried to imitate either Ivory or dial and Dove they never made it the ivory case also shows

us that the successful strategies are ones that are consistently implemented over long periods of time you can't succeed in strategy if you're flip-flopping what you're trying to be every year the flip-flopping not only confuses your organization but it confuses the marketplace the marketplace doesn't really know what to make of your product or service now the ivory story however vividly illustrates the principle that strategy has to change if the industry structure or competitive positions uh change enough the emergence of new buyer needs the threat of new competitors May force a company as it did Ivory to

shift its strategy in Ivory's case from differentiation to low cost but shifting a strategy is a very risky and very timeconsuming process and ivory shows how long it took really to fundamentally reposition the company now we've seen a company that's drawn its cost Advantage from a broadly targeted strategy let's look at another company that succeeded in creating a cost advantage through Focus boy I sure I'm glad I didn't have to drive here from Boston it had taken me about 40 hours because I'm in San Antonio Texas and I've just driven up to a place called

laint that means Country House in Spanish lint is one of the most successful Motel chains in the United States founded in 1968 today it has a about 200 locations spread all over the southwestern part of the United States and and and outlying areas L's results uh during the 70s and into the 80s were truly spectacular second to none in recent years however lintas profits have been modest uh it's been hit by the Texas energy recession by problems in the agricultural sector uh and by a dramatic overbuilding of motel rooms in this region but short-term profitability

is not a good measure of the Strategic health of a company and Lita provides an excellent example from a strategic point of view linta could not be in a stronger position their customers are satisfied their competitors uh can't match them and Consumer Reports recently evaluated them as the leading uh lodging chain in their category now to understand Lita's strategy I think the best place to start is just to go take a look now what's going on here what's going on is that most lodging companies cater to a wide range of Travelers with a wide range

of needs they have families they have high rollers they have Chief Executives they have people traveling for personal reasons and they provide those Travelers a wide range of services to meet their equally wide range of needs uh daycare for the family a fancy sweet for the High Roller uh a room service for the tired executive who doesn't know where else to go to dinner and doesn't want to be go out alone instead of trying to serve a wide range of Travelers and meet their equally wide range of needs Lita has chosen to focus on a

particular kind of traveler a particular Target customer and dedicate themselves to meeting this particular customer somewhat unusual needs a classic Focus strategy now l Target customer is a commercial man or commercial person a sales representative a service representative an auditor somebody who travels frequently who travels repetitively over and over again to the same places the average linaa customer spends 17 nights a year in a linta linta seeks to meet the needs of this somewhat peculiar customer very very well and no more and as we'll see everything in a linta and throughout the linta organization is

consistent with this objective linta strategy starts with location location location as Sam barshop L's founder told me recently uh you can change just about anything about a motor in except where it is every Lita is located right next to a major highway often an interstate highway it has good access and excellent visibility the Lita is near an industrial park and airport a medical complex somewhere where business people go a lot now over here you'll see a restaurant right across the way from the lint the restaurant is open 24 hours a day in fact every single

L is built next door to a 24-hour restaurant many of them are Denny's now the fact that there's a restaurant right there means that Lita doesn't need a restaurant of its own at all if its guest wants to go to breakfast it just walks across the the street lito wants no part of the restaurant business for a number of reasons the first is that Sam barop lost his shirt in the restaurant business when he was growing up more importantly though the restaurant business is a different business than running a motel and it's a business that

most lodging establishments lose money on and have to subsidize with higher room rates now my room here is about 300 Square ft in size that's as big or even bigger than a Marriott or Hilton or a Sheron room would be and to top it off linta's rooms are all built with an allc Concrete Construction technique and this construction technique combined with a lot of soundproofing between the various rooms means that it's quiet it's beautifully quiet and you can actually get a good night's sleep now when you combine all this with 24-hour message service and in

a heavy dose of good uh down home personal attention what you get for a lintas customer is truly an irresistible deal and it's an irresistible deal that cost only $40 substantially less than a comparable room would cost at a competitor morning good morning Mr Bailey will you be checking out this morning will room 107 that's correct thank you excuse me can I ask you a few questions sure uh what do you do I'm a Salesman I travel the state of Texas selling newspaper vending machines of all things oh really how have you been here before

Oh yes yeah I stay here every time I'm in San Anon and how often is that well I get through here about every four weeks about every four weeks why do you stay here well I think probably the most main reason I stay at AA is consistency uhhuh every Motel is like the other one and all the rooms are comfortable I know what I'm going to get in advance now they don't have room service here does that bother you no not at all not at all why not well I I don't really to require that

I uh uh traveling I'm out to lunch with people during the day sometime I have evening appointments that I make and I'm busy so throughout the day I uh keep myself moving and uh to be catered to the motel I don't require that I just want a good place to sleep and rest and do my reports to get on the next day and L is that place oh absolutely now the question is how is linta able to deliver all this at such a low cost now the first reason should already be apparent from what we've

seen so far Lita avoids unnecessary services from the perspective of their Target customer they also avoid wasted space there's no restaurants there's no room service there's no Atrium this means that the operating cost per room at linta is held down it also means that the amount of investment required per room at L is also low despite the fact therefore that the room itself is as big or bigger than the competition linta's cost are lower now another reason why linta's cost are controlled is that there's a corporate fetish here for cost control uh corporate overhead is

held down uh construction costs are managed carefully purchasing costs are managed carefully the corporate headquarters itself is sort of an interesting symbol of this it's nice but it's modest there's no Oak paneling There's No Frills uh uh that that eat money now in addition to these things however perhaps the secret weapon in Lina strategy is a couple of all things unlike most other lodging chains a linta is managed by a husband and wife team they run the desk they supervise virtually every aspect of what goes on here and they actually live here they live in

an apartment A nice apartment provided on the premises along with some other perks now the fact that linta is managed by a couple holds down overall management costs the couples are also very loyal to the company they stay at linta 5 years seven years 10 years reducing expensive turnover and a final bonus and perhaps the most important bonus of all is that the couple and the other employees that they manage almost like a family at L provide warm friendly service and a great deal of personal attention so you can better understand L couples receive extensive

training before they ever take over a motor in about 12 and a half weeks of training in all right now I'm in something they call the maintenance training lab and spread around this room are all the things that go wrong in a motor in roofs air conditioners TV sets uh faucets Plumbing lamps and in this room the Lita couple uh learns how to make basic simple repairs on the spot now this does a number of things first of all it makes the repairs happen quickly you don't have to wait for somebody to show up but

very importantly it reduces cost and it's this kind of clever thinking along with the design of the rooms along with the sturdy construction along with a lack of unnecessary services that makes Lita such a lowcost provider of Motel services let's take for example having a bar uh at linta you know uh at the end of a long day a Salesman comes back and wants to have a drink why isn't there a bar at Ling you think that it's not a bar because it's extra Services my my my theory has been and it it it's stronger

every day is that the more services you give a customer the more chances you have to make a mistake if they want to drink they'll take a bottle to the room or they'll go to a a restaurant near the property and have a drink but uh we don't we have found that is not way down the list as far as as priorities as far as our customer goes but I guess it's fair to say that that when you build a strategy around this customer uh you're deliberately making a choice that there's some other customers with

some other needs that might not be satisfied and you're just making the choice I think and I think in in in our industry and I think in all industry you really have to Target in on your customer understand your customer and listen to your customer customer and work with your customer and and and pay attention every on their needs and their needs change they changed yearly MH uh we put in colored television then we had to put in cable then we had to get free coffee the free telephones there are things that they demand and

we we constantly serving our customers and see what they want because they're the boss I'm not the boss of this company it's every customer that walks through that door let's just pick a company like Marriott Marriott has got its core product it's its large properties that are located all around the country but it's got this Marriott Courtyard concept now what's Marriott trying to do are they trying to kind of come after the Le segment is that what's going on marot is trying to be the General Motors of the industry and and they're going to be

the difference between marott and Lita is marott Thinks Big Lita think small how about uh how would you compare Lita to say a Motel 6 the classic mot Motel 6 knows what they are and they they're they're another good company they know what they are uh they're selling room for about $20 a day they are not competing for our customers they're taking people off the backs of motorcycles and and campers and put them into a m Teran Lita has always had a a a very great sensitivity to cost uh partly to keep the price of

that room down because that's essential to the strategy how do you keep the attention to cost in the company let's say I talk about nichels and NES every one the we're not working on dollars in this company we're working on Nicholas knives we're working on minutes in cleaning room and we're working on every every dollar we can save in building a building we can make because our buildings are are so cost effective now we know every nail we know every rck that goes in that building we know what the land cost should be uh we

we understand the product and that's see that's a big advantage of having only one product we know it well from bottom to top when I hear you talk it seems almost to me like you're managing a private company but you're public how do you do that you know they hear a lot of talk about Wall Street putting short-term earnings pressure on companies but yet you continue to spend on Renovations in the teeth of the Texas recession and and and all those kind of things how can you get away with it well look it's very simple

you have to look around you at American industry and see what's happened to the people that have had short-term perspectives and I you can't run a company short term and if you let Wall Street run your business you're not going to be in business too long I don't think what are the lessons we can learn from Lita's strategy well Lita is our first opportunity to look at a focuser and there are some important principles in linta story for competing with a focus strategy Lina also will allow us to broaden our understanding of what it takes

to be successful in competing on cost now L illustrates that a focus strategy starts with the Bedrock of choosing a particular Target segment whether it be a particular Target customer a particular item in the product line a particular geographic region but this Target segment has to have unusual or distinctive needs if they're not unusual the focuser won't gain any advantage over the broadly targeted competitor who will serve the segment perfectly well uh as part of their broader strategy now a focuser dedicates everything they do to serving the target segment exclusively and not worrying about anybody

else we see in Lita strategy how every step of their product and service offering related to that uh traveling salesperson and how that that tied together everything lint did L case also shows that any focuser is always under constant Relentless pressure to broaden or fuzz their strategy there's always a temptation to add an extra service or add an extra product in order to get a few more customers but this temptation simply must be resisted because if a company starts to fuzz the edge of its focus strategy it will lose the essential competitive advantage on which

it's based which is this dedication this consistency of everything they do to that particular Target now what can we learn from lint about competing on cost well we learned that a cost focused strategy depends on finding a Target segment that has somewhat lower needs for services or features than most of the market in L's case their customer didn't want a lot of services and features that most motels offered and laa was able to be low cost simply by finding this customer with that lower level of need lint shows how cost Advantage requires investment Lita spent

aggressively on management information systems to reduce the bookkeeping requirements in the locations they used all Concrete Construction which lowered the maintenance cost but it was expensive they also uh aggressively renovated their properties to keep the level of the quality of the product up a final very important lesson from linta strategy is how uh cost leadership requires that costs become really part of the culture of the company it becomes something that everybody in the company is worrying about every day and we certainly saw this at linta now we've seen two companies competing with cost-based strategies one

with a broad Target and the other choosing the strategy of cost Focus to get some additional perspective on competing on cost let's go to Emerson Electric company and talk to Chuck Knight Emerson's CEO Emerson is probably the company in the United States that's most identified with being a successful lowcost competitor Chuck Emerson uses the term best cost producer to describe its approach to a cost leadership strategy what steps does Emerson take to be the best cost Producer Mike that's a I guess a long story because it evolved out of first uh being the the the

lowc cost producer which was kind of a theme we had across the corporation in the 70s but as we started to get in the whole concepts of worldclass manufacturing uh we knew just being the lowest cost producer wasn't the answer and and so we moved to a definition of best cost producer which involved six key points for us that we used as communication techniques across the corporation to Define what we were trying to do and the first was uh quality we couldn't be the best cost producer without having the best quality they were synonymous and

uh secondly was to know the competitor's cost uh people just really can't know where they are if they don't take the time and energy to find out what their competition's costs are third was the the need to have a receptivity to change and and and and the willingness to go after productivity in your plants and uh the the responsibility of management to set that tone and environment uh fourth is a formalized cost Reduction Program uh which is part of the planning process and uh too many times companies do their cost reduction when times get tough

and not on a continuous basis as a part of a desire to maintain or achieve a certain level of profitability so formalized cost reductions strong Communications related to those cost reductions because we like to think as a part of our best cost producer plan that all of our employees are are part of it they feel ownership and uh the enemy isn't management it's it's it's truly the competition so uh that's five and and the six is the commitment of capital to to make it happen why is quality so important well to being low cost because

it's sort of a paradox yeah yeah it's h well we when we were in the lowcost producer strategy everybody used to say is all you guys do is cheapen your product you know you'll take material out or you'll do this you'll do that and and really the thing we're selling is the ultimate function and and and what our product does and and we found and and I've got to say we learned this from our competition in the 70s and the early ' 80s that that they have the highest quality ultimately all the way through the

loop I'm talking not just quality in the plant but quality in all the systems and the customer support and and everything that goes on in the company to measure all that cost of quality across the board that if you had the best quality you also had the lowest cost so that quality and cost aren't inconsistent in fact they're kind of complimentary in many ways exactly yeah exactly you mentioned knowing your competitor's cost uh most companies don't tell you their cost how do you go about it Amerson really understanding your competitor's cost we show every one

of our competitors products to our people and where they're better than we are or what we're trying to do to make sure we have an edge and what the individual employees involvement is in that process and that's really the exciting part of it because once you really understand your competitor's product and it's cost you can then communicate more clearly to your employees why we have to do certain things the people start to understand when they can touch and feel and and and really see what what they're what what the battle is all about if it's

the competitors cost that are forcing us to do this not our crazy dumb management who's trying to beat us up that changes the tone doesn't it it really does and and and not people like to win I mean it's inherent in all of us we want to win and so once they see what the target is and who the enemy is it's a lot easier to focus all those resources and energies and and fun too yeah it sure is one of the things you mentioned Chuck was Emerson's formalized cost Reduction Program could you describe that

yeah I I it's kind of nuts and bolts but it might be of interest to you like can very much so what we've been doing this a long time and and uh what happens is in our planning conferences we will through the process of trying to understand the business the competition and the rest of it get at a level of profitability that we are going to Target mhm and out of that evolves a cost reduction Target and this goes on in 50 60 different companies M and that particular company will and every year this goes

on as we go through our financial reviews we set in motion how much cost reduction do we have to get and in each plant is a man who has a or woman who has a responsibility for cost reduction and then a quarterly system of followup uh monthly in the divisions but at corporate we quarterly review the the cost reduction progress and are we on target or aren't we are on Target and where are we missing and where are we not making it and of course that includes productivity as as well as any other kind of

cost reduction and that's tied directly back to our our Capital spending of course I think I I recall seeing a a list of cost reduction projects in a in a division or plant tell me about some of the projects give us a feeling for I guess there there's probably not one project that if we or maybe 10 or 50 if we if we didn't do them it wouldn't matter I mean that's the beauty of it and I like to say that you could go into any Emerson plant any Emerson plan and walk up to one

of the people on the machine and ask them what cost reduction they're working on and they'll describe it to you and how many projects would a typical plan have oh hundreds hundreds hundreds hundreds now this notion of being a best cost producer is something that I think if I turn to just any random Emerson Ann report I'll find it written in here not only will I find it but I'll find the steps laid out so what you're doing is not a secret to your competition why can't they match you and one up you because of

the the the subtle point you made earlier this this is not something that you put in a box and you know bring out when you need it it's a part of a management process that is tied back to what we're trying to accomplish as an objective for the company we've had I think half of fortun's 100 come down and talk to us over let's say the last five years about cost reduction but if your management process isn't set up in all the subtle ways to incorpor that and make it work it won't work for you

I think my discussion with Chuck Knight is a very fitting way to conclude our discussion of cost strategies it illustrates again a number of vital points about this route to competitive Advantage first cost leadership starts with a good product there's nothing cheap or or inadequate about a lowcost producer's product or service it's good but a cost leader is willing to make some choices in order to uh be low cost to give away some Frills and features we've also seen over and over how successful cost leaders draw their cost Advantage from many sources throughout the business

wherever they can find it it's not just in manufacturing it's not just in design as Chuck Knight has particularly emphasized successful cost lead leaders pay intense and regular attention to their competitor's cost positions they do the homework the hard work necessary to understand their competitor's cost and use that as a focal point for understanding where they stand all cost is relative and competitors are a wonderful motivating device to drive an organization towards ever lower cost we've also seen and Chuck has emphasized how successful cost leaders have cost literally built into to the culture of their

organization everybody is worrying about cost basically all the time now many companies have the misconception that they can successfully compete on cost by having kind of episodes of cost reduction everybody worries about cost for three months uh chops out some people and breathes a s of relief the Emerson case as well as the others we've looked at shows how cost leaders constantly manage cost down they constantly have a program to drive cost further and further this is what it takes to be a successful cost leader many managers have a misconception about cost strategies somehow they

view cost strategies as cheap or low wage or somehow dishonorable I've gotten the sense in many companies that real managers don't compete on costs that's somehow a sign of failure I hope those uh misconceptions have been vividly overcome by what you've just seen cost is one important and viable route to competitive advantage and many of you uh probably ought to choose it