v ewer's G u d e

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Video
Contents
and Outline

Tape 1 Part I. Segment 1: 20 minutes 2

Introduction Industry Analysis

Part II. Segment 2: 25 minutes 6

Competitive Cost Leadership I
Positioning Ivory Soap

Segment 3: 26 minutes 8
Cost Leadership II
La Quinta Inns
Emerson Electric Co.

Conclusions: 9
Cost Leadership

Tape 2 Part II. Segment 4: 20 minutes 9

Competitive Differentiation I
Positioning American Airlines
continued

Segment 5: 21 minutes 10
Differentiation II
Cray Research, Inc.

Overall Lessons 10
about Positioning

Part III. Segment 6: 18 minutes 11

Competitive Skil Corporation Case
Strategy
in Practice

Segment 7: 16 minutes 12
The Process of Developing
Strategy

Lessons for Effective 12

Strategy Development
Introduction This first program in the Harvard
Business School Video Series cov­
ers the theory and practical impli­
cations of Michael Porter's views
on how to analyze an industry and
create an effective strategy for
competing in that industry.

Preparation In order to benefit the most from
the program, the viewer is advised
to begin by reading "How Compet­
itive Forces Shape Strategy;" which
appeared in the March-April 1979
issue of the Harvard Business
Review (the article is included in
the supplementary materials).
This article contains Porter's ideas
on industry analysis. I The viewer
may also want to read Chapter 2 in
Competitive Strategy: Techniques
for Analyzing Industries and
Competitors (New York: The Free
Press, 1980). This chapter summa­
rizes Porter's core concepts about
competitive positioning. Viewers
interested in an in-depth treatment
of industry analysis and position­
ing should review the balance of
Competitive Strategy and Porter's
book Competitive Advantage:
Creating and Sustaining Superior
Performance (New York: The Free
Press, 1985).

Overview of The video portion of the package is

the Program broken down into three major sec­
tions, which you will find on Tapes
1 and 2. The following is a the­
matic and visual outline of what
the enclosed videotapes contain.

2
IChapter I of Competitive Strategy covers
the same subject.
 Tap e 1

Part I Porter defines competitive strat­ "There are substantial bene­

Introduction egy. He identifies the two funda­
mental questions in strategy­
first, What makes an industry
attractive? and second, What posi­
tions within an industry lead to
superior performance? Answering
these questions is vital to develop­
ing a strategy.
Porter offers some additional
comments about the need for an
explicit strategy:
"Defined the way I do, every
company has a strategy. It may
have chosen that strategy through
an explicit process of analysis, or it
may have just developed the strat­
egy implicitly, by accident, over
time. In many companies, strategy
has never been discussed in an
explicit way.
fits to being explicit in developing
strategy. One is that you make sure
that all the parts of the strategy fit
together, that they're consistent.
Another is that it allows you to
communicate the strategy to the
employees, the people who have to
carry it out. Finally, an explicit
strategy allows you to test the
assumptions under which the
strategy is set to see whether it is
time to change!'

3
 Tap e 1
Segment 1. Porter discusses the five forces that
Industry Analysis determine the nature of competi­
tion in an industry-threat of new
20 minutes entrants, bargaining power of cus­
tomers, bargaining power of sup­
pliers, threat of substitute prod­
ucts or services, and rivalry among
industry competitors. These are
shown in Figure 1.
Figure 1: Determinants of Industry Profitability
4
Several underlying determi­
nants (summarized in Figure 1)
govern the strength of each com­
petitive force. The article "How
Competitive Forces Shape Strat­
egy" (or Chapter 1 of Competitive
Strategy) gives a full explanation of
these determinants and how they
affect industry competition.
 T a' p e 1

Segment 1 Pharmaceuticals Industry Change

continued To illustrate a very attractive Industry structure changes as a

industry with high average profit­ result of environmental forces as
ability, Porter discusses the phar­ well as company actions. Porter
maceutical industry. Traveling to describes how to analyze industry
several locations, he applies the structural change using the five­
five-forces framework to explain forces framework. He returns to
why it is so profitable. both the pharmaceutical and air­
line industries to illustrate how
competition in these industries is
likely to change-in airlines for
"
Airlines better and in pharmaceuticals for
worse.
Porter discusses the airline
industry as an example of a much
less attractive industry. He illus­
trates how government policy
can affect industry structure and
uses the five-forces framework to
explain the mediocre profits in
airlines in the years following
deregulation.

1 4
Industry analysis is the starting Managers have the power to shape
point of any strategy. Managers their industries and affect how
have to understand the structure they evolve. Companies should use
of the industries that they are strategy not only to improve their
competing in, and the underlying own position but also to make the
reasons why that structure is what whole industry more attractive.
it is.
5
2 Companies should test their stra­
Each industry is different in terms tegic moves to ensure that they do
of which competitive force will be not unwittingly undermine the
most significant. The most signifi­ attractiveness of their industries.
cant force is the area where stra­
tegic attention must be placed.

3
Managers constantly need to be
aware of how their industry might
change. Some changes will be both
important and revolutionary.

5
 Tap e 1
Part II How does a company achieve supe­
Competitive rior performance within its indus­
try, whatever the average industry
Positioning profitability may be? To be profita­
ble in an industry, a company must
have a sustainable competitive
advantage. There are two basic
types of competitive advantage:
lower costs than competitors or
the ability to differentiate by offer­
ing the customer something
unique. A differentiator com­
mands a premium price.
Figure 2. Generic Strategies
Failure to make a choice means
that a company is stuck in the
middle, with no advantage. The
result is poor performance.
Part II of the video discusses
four superior performing compa­
nies that follow each of the generic
strategies. Ivory Soap is a broadly
targeted, low-cost producer; La
6
In pursuing competitive
advantage, a company also has to
choose its scope-whether it will
target a particular segment or go
for a broad market. These choices
define four basic approaches to
competitive advantage that are
illustrated in Figure 2. Which set
of choices a company makes deter­
mines which "generic strategy,"
as Porter calls it, a company is
following.
Quinta Inns is a cost focuser;
American Airlines is a broad dif­
ferentiator; and Cray Research,
Inc., is a focused differentiator. The
companies and the generic strate­
gies are indicated on Figure 2.
(For further background on the
generic strategies, consult Com­
petitive Strategy, Chapter 2.)
 Segment 2. A cost strategy begins with a
Cost Leadership I good product that is acceptable
in quality and features. Instead of
25 minutes a unique product, the company
following the cost strategy seeks
advantage by opening up a sustain­
able cost gap over its competitors.
It does so by managing the areas in
the business that are critical to
\ cost. This leads to superior mar­
gins, provided prices are at or near
1 the industry average.
Porter uses Procter & Gam­
ble's Ivory Soap to illustrate the
basic principles of positioning and
Figure 3. Soap Industry Positioning
Provided they choose different
generic strategies, a number of
companies can compete success­
fully in the same industry.
\ 2
I Successful strategies are ones that
are consistently implemented over
long periods of time.
3
Strategy has to change if the indus­
try structure or competitors' posi­
tions change enough.
4 cost.
It takes a long time to complete a
strategy change.
7
to discuss the overall cost-leader­
ship strategy. Ivory's strategy has
changed since it was first intro­
duced. Porter shows how Ivory
moved from being a differentiator
to being a basic soap providing
good value. Its current position is
shown in Figure 3. Ivory's shift in
strategy illustrates both why strat­
egy may have to change as well as
some principles of competing as a
cost leader.
Porter then interviews John
Pepper, president of Procter &
Gamble, about Ivory's strategy.
5
Ivory is successful because all ele­
ments of its strategy reinforce its
positioning and contribute to its
cost advantage.
6
A low-cost strategy must begin
with a good product, though it may
lack features or frills contained in
competitors' products.
7
Successful cost competitors find
ways to make a virtue out of the
product features that lead to low
 Tap e 1
- Segment 3.
Cost Leadership II
Companies can also achieve cost
advantage by focusing on a particu­
lar target segment where they can
26 minutes be more efficient than broadly tar­
geted competitors. Companies in
this position achieve advantage by
dedicating themselves to serving
the needs of a particular segment,
and no more. Porter shows how La
Quinta Inns has created a strategy
1 4
A focused strategy begins with
choosing a particular target seg­
ment with unusual or distinctive
needs.
2 5
A focused strategy dedicates every­
thing to serving the target segment
exclusively.
3 Low cost must become part of the
Despite temptations, a focused
strategy forgoes the opportunity to
serve other segments, or offer other
products or services.
This segment ends with Porter
interviewing Chuck Knight, CEO
of Emerson Electric Company.
Emerson is the company most
identified in the United States
with being a low-cost competitor.
They discuss how Emerson goes
about succeeding as the "best-cost
producer."
Chuck Knight lists six points
that have been critical to Emer­
son's success:
1
You can't be the best-cost producer
without having a high-quality
product.
2
Know the competitors' costs.
8
around a particular target cus­
tomer-the traveling salesperson­
and how this dedication satisfies
the customer's needs but allows La
Quinta to be very low cost. Porter
takes the viewer to a typical La
Quinta Inn in San Antonio, Texas.
He also interviews Sam Barshop,
CEO of La Quinta.
A cost-focus strategy depends on
finding a target segment that has a
lower level of needs than most of
the market.
Cost advantage requires
investment.
6
company's culture if this strategy
is to be successfully implemented.
3
Be receptive to change and be will­
ing to go after productivity in your
plants.
4
Devise a formalized cost-reduction
program.
5
Make all employees a part of the
cost-reduction plan by communi­
cating the plan to them strongly.
6
Commit capital to reduce long-run
costs.
 Tape 1 ,

1 4
Cost leadership starts with a good
product.
2
A cost leader is willing to make
some choices to be low cost.
3
Successful cost leaders draw their
advantage from many sources
throughout the business.
Cost leaders pay intense and regu­
lar attention to their competitors'
cost positions.
5
Cost leaders build low cost into
the culture of their organizations.
6
Cost leaders constantly manage
costs down.

Segment 4. Now that the viewer has seen how
Differentiation I a cost strategy works, Porter turns
to the differentiation strategy. The
20 minutes differentiation strategy starts by
identifying needs that the buyer
thinks are valuable. The differen­
tiator then sets out to meet these
needs better than any other com­
petitor, and is willing to bear extra
costs if necessary to do so. The dif­
ferentiator seeks to command pre­
mium price, which leads to supe­
rior performance provided the
premium exceeds the extra costs
of being unique. To illustrate his
points, Porter discusses two com­
panies- American Airlines and
Cray Research, Inc.-that success­
fully use differentiation strategies.
American Airlines serves a
wide range of travelers (business,
vacation, personal) and seeks to be
the differentiated airline. Porter
takes the viewer on a tour of Amer­
ican Airlines to illustrate its
approach to differentiation. Porter
concludes this segment by inter­
viewing Robert Crandall, CEO of
American Airlines.

1 differentiating where the extra cost

Any differentiator starts with the
problem of creating value for buy­
ers: successful differentiators find
areas of value that the buyer views
as most important.
2 In the pursuit of differentiation,
Successful differentiators not only
create value, they also communi­
cate their uniqueness to con­
sumers in credible ways.
to them is as little as possible and,
even better, where it is less than it
would be for a competitor trying to
emulate them.
4
there is a trade-off between cost
and differentiation. Successful dif­
ferentiators are clear about how
they're going to make it.

3 5
Differentiators must be willing to To sustain differentiation, a com­
bear the cost of being unique. Dif­ pany must be a moving target and
ferentiators must, however, mini­ constantly invent new sources of
mize the added costs of unique­ buyer value.
ness. They want to find ways of

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 Tape 2 '
SegmentS. Another route to differentiation is
Differentiation II through a focus strategy; that is,
choosing a narrow target and con­
21 minutes centrating on serving its needs bet­
ter than more broadly targeted
competitors.
Cray Research, Inc., which
manufactures only supercompu­
ters, is a good example of a com­
pany that targets a specific product
1 S
Differentiation starts with creat­
ing value for the customer that jus­
tifies a premium price.
2 market.
Differentiation involves more than
just a physical product. tielping
the customer to use the product is
as important.
3
To be successful, a differentiation
strategy must be communicated
both internally and externally.
4 in pursuit of incremental business.
To sustain differentiation, a com­
pany must become a moving target
by improving performance and
constantly seeking innovation.
This segment concludes with
some general lessons about posi­
tioning drawn from all four
companies.
1 3
Successful strategy must concern
itself with industry structure as
well as positioning.
10
segment and dedicates itself to
providing uniquely high perform­
ance. Porter takes the viewer on a
tour of the Cray facilities in Min­
neapolis and Chippewa Falls, Wis­
consin, and interviews, among
others at Cray, John Rollwagen,
Cray's CEQ.
The differentiation focus strategy
requires that the company isolate a
segment that has more extensive
needs than most parts of the
6
The focuser dedicates itself to (and
bets everything onl its particular
target segment(s).
7
A focused differentiator, like a
focused low-cost competitor, must
avoid the tendency to blur its focus
2
Successful strategists select posi­
tions that are different from their
competitors'.
Strategy involves making choices
and trade-offs, and taking risks.
These are the flip-sides of
advantage.
 Tap e 2

Part III.
Competitive
Strategy
in Practice

Segment 6. By this time in the program, the
Skil Corporation viewer is acquainted with Porter's
Case theory of competitive strategy. But
the viewer might ask how the
18 minutes theory can be used to help a strug­
gling company reposition itself.
How, in other words, can theory
remedy reality?
To provide some additional
insights into the issues facing
companies in the midst of change,
Porter puts the viewer into the
strategist's chair to consider the
problem facing Emerson Electric
management, which has acquired
SkiI Corporation, a power tool
manufacturer.
Porter briefly describes the
situation facing Skil in 1979 (an
accompanying written case study
provides further details). The
viewer is asked to consider what he
or she would do. To offer further
input on the issues facing Skil, Por­
ter takes the viewer into a Harvard
Business School classroom to see
his students tackle the question of
what Emerson Electric should do.
After the discussion of the
case, Porter goes to the main Ski1
plant, in Heber Springs, Arkansas,
as well as to a hardware store in
Nonantum, Massachusetts, to
describe what Skil actually did.

1 3
A successful strategy may Choosing a strategy requires mak­
involve a new way of approaching ing tough choices among products,
the industry. A new positioning, services, and channels.
rather than imitation, is required
to improve competitive position
against capable competitors.

:2
A company facing competitors
with greater size and reputation
must focus.

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 Tap e 2
Segment 7. In this final segment Porter dis­
The Process of cusses some of the practical prob­
Developing Strategy lems of developing and carrying
out a strategy. Important issues are
16 minutes how to organize an effective plan­
ning process, how to communicate
its results, and how to measure
performance.
1 5
To develop strategy effectively, a
company needs a formal strategic
planning process.
2 To gauge strategic health, compa­
A multi-functional team is the
best unit to develop a strategy. It
can take the holistic approach and
make the complex trade-offs
essential to sound strategies.
3
To be successful, a strategy needs
to be communicated, both inter­
nally and externally.
4
It takes time to change and com­
municate a strategy. A strategy
should be changed infrequently
and must be followed consistently.
12
Porter interviews Bill Davis,
President of Skil Corporation,
about how he created the Skil
strategy and the problems
encountered in carrying it out.
Porter concludes the program
with a wrap-up of the main points
he has made about competitive
strategy and some highlights for
managers to remember.
Financial results are a misleading
indication of strategic health.
6
nies have to create measures of
underlying advantage, such as
customer surveys, studies of cost
position, and studies of how prod­
ucts are performing relative to
competitors'.
7
A strategist must continually
probe and test a strategy for the
need to change.
Supplementary Included as supplementary mate­
Materials rials for instructional use are:

User's Manual: How to Use the

Video Program

SkiI Corporation Case (5 copies)

Harvard Business Review Article

(5 copies)

Summary card

Order forms to purchase additional

or related materials

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