Me and Michael Porter on Strategy (part 1)

I last saw Michael Porter present at the CIPD conference in Harrogate over 20 years ago and seeing him speak again was one of my main reasons for attending WOBI.  And if you're wondering, given the title of the post, no, I wasn't talking with him (you'll understand the reason for that title later on). Porter kicked off with an overview of his ideas on strategy, which were good to hear again.

Business strategy is about deciding on whose needs and which customers you are going to serve and then on how to do this uniquely well. If you're going head to head you're not going to win. Mission statements, a desire to be #1 or 2 in a market, etc, are not strategies. Strategy is a concrete set of choices about your business in order to deliver unique value to whatever customers you want to serve. You can't serve all customers or meet all needs so you need to be distinctive about where you're going to play.
 

If you compete on price and that's the only thing then Porter feels sorry for you as you're likely to enter into a race to the bottom. So ideally you want to differentiate, to create something unique about you meaning that you can charge a premium price. This depends on a unique value proposition supported by a value model which enables you to deliver the unique proposition efficiently. Often this will require trade-offs too. And everyone needs to know the answers to these questions or your sales people will go and talk to the wrong people etc.

Ie you need to tailor the primary and support activities in the value chain around this proposition. Eg how do you manage your human resources and what type of human resources are you trying to attract? You can't do what everyone else is doing. This provides a new operating model. 

Strategy is not execution. Porter hears things like it's all about execution, and execution eats strategy for lunch that it doesn't even bother him any more. But choices are different to execution. If you can't figure this out you've got a problem. There's no one best strategy, just whether it offers unique value to the customers it wants. And integrating these choices through the value chain and activity system to provide fit. There's no such thing as a good Marketing or HR strategy, only good HR for the overall strategy, so it all fits together as part of an overall holistic system.

I really enjoyed the session and was disappointed to overhear a couple of people later suggesting it was like listening to their lecturers at college. I wanted to tell them: believe me, your lecturers weren't even in the same galaxy as Porter. And what did they expect anyway. As Porter said, strategy is used too loosely, at a very high level. But it's actually incredibly specific. About how it relates to your industry, your choices and how you position yourself. If you're Simon Sinek speaking about a need to change your mindset you're just going tell a few stories (this is me again now). If you're Gary Hamel and you want to get people excited about a problem that doesn't really exist then you're going to share some research evidence and case studies.  But if you want people to understand a precise way of doing strategic management then you're going to need to share some models.

(This is probably also the reason that the leadership competency framework used by Hamel in his presentation only showed 'Thinks strategically' as an executive level competency.)

But I suppose the main reason I enjoyed the session is that I often talk and write about Porter's ideas, in fact, this, coincidentally, was published today. Please do go there and read it as you'll want that background to fully understand the rest of the post. Because I also apply Porter's thinking and models to HR and organisation design.

In ‘Towards a Dynamic Theory of Strategy’ Porter writes that his thinking recognises his value chain is based on a chain of causality:

"A fundamental issue in creating a theory of strategy is where to focus the chain of causality, A stylized example will illustrate. We might observe a successful firm and find that its profitability is due to a low relative cost position compared to its rivals. But the firm's cost position is an outcome and not a cause. The question becomes: Why was the firm able to attain this cost position? Some typical answers might be that it is reaping economies of scale, or has moved aggressively down the learning curve. But again, the question becomes why? Some possible answers might include entering the industry early, or the firm's ability to organize itself particularly well for cost reduction. Once again, however, the question becomes why? And we could continue moving along such a chain of causality even further. 

The literature in both strategy and economics addresses many different points in this chain of causality. Indeed, many differences are less conflicts than theory positioned at different points in the chain, as we will see later. Any theory of strategy must grapple with how far back in the chain of causality to go. The answer may well be different for different purposes. A theory that aims very early in the chain may be intractable or lack operationality. Also, aspects of the firm that are variable in the long run may be fixed or sticky in the short run. Conversely, a theory oriented later in the chain may be overly limiting and miss important possibilities."

I use this argument to suggest a sequence of four value chains (taken from The Social Organization), and in particular that there is an organisation value chain. This chain describes the inputs, activities and outcomes that relate to the management of people within an organization.

Organisation strategy is about deciding on what needs in your business you are going to serve and then on how to do this uniquely well. It is a concrete set of choices about your organisation in order to deliver unique value to whatever business needs you want to serve. You can't meet all needs so you need to be distinctive about where you're going to play.

If you compete on cost and that's the only thing then you're likely to enter into a race to the bottom. So ideally you want to differentiate, to create something unique about you meaning that you can provide a premium contribution to your business. This depends on a unique value proposition supported by a value model which enables you to deliver the unique proposition efficiently. Often this will require trade-offs too. And everyone needs to know the answers to these questions or your managers and business partners will spend time with the wrong people etc.

Ie you need to tailor the primary and support activities in the value chain around this proposition. Eg how do you manage your HR department and what type of HR people are you trying to attract? You can't do what everyone else is doing. This provides a new HR operating model.

Strategy is not execution. Choices are different to execution. There's no one best strategy, just whether it offers unique value to the business it supports. And integrating these choices through the organisation value chain and activity system to provide fit. The organisation strategy describes good organisation and people management for the overall strategy, so it all fits together as part of an overall holistic system.

Ie most of the logic used by Porter for business strategy applies really well for organisation strategy too. In fact this is the way I suggest we deal with Hamel's point that whilst business models have changed, organisation models haven't. It's because not enough people understand or use tools like the organisation value chain to change and develop best fit, differentiated value chains. My and Michael Porter's logic shows the way to do this.

I had a press interview with Michael Porter at the conference and asked him about the above. However. I'm going to report on that later on...

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