Michael Porter: Aligning Strategy & Project Management

Uh, so ladies and gentlemen, please join me in welcoming Michael Porter.

Well, Mark, thank you. That was embarrassing, but much appreciated. It's truly a great fun for me to be here. I'm an engineer by training, an aerospace engineer, and I love projects. What you guys do in this field is actually a core discipline of management; it makes things happen. It's particularly important to make change, to get things done in organizations that are non-routine, that require new ideas, advancements, and innovation.

But I think the reason I'm here, and I think Mark just said it well, is that actually any project or any program is just inevitably embedded in a strategy for the overall organization. Ultimately, if we don't understand that strategy, and if that strategy isn't well thought through, then we can't decide whether we've got the right project or the right program. If we don't have clarity on the strategy, we can't decide whether we've got the right goals and specifications for our project or our program in terms of what we're trying to achieve.

If we don't have a clear sense of the overall strategy, then it's pretty hard to connect a project or a program to what's going on elsewhere in the organization in a way that would ultimately deliver value and competitive advantage, or good service to the community if you're a government agency or whatever you do.

So fundamentally, strategy and project, portfolio, and program management are kind of joined at the hip. The question is, how do we ensure a very clear and powerful connection and alignment between those things?

Now, one way of doing that is to rely on your senior management. They're the ones that have to worry about strategy, and they tell you what the strategy is, and therefore you make sure that the program or the project is aligned. But I will tell you that that's not what I think we need to rely on. I think ultimately, to do your job well, you have to have a really good idea and a really good sense of what the strategy is.

What we find over and over again is that often senior management are not necessarily that good at communicating strategy and making it clear, for reasons I'll talk about a little bit later. So I think those of us sitting in this room, we have to take responsibility for this too. We have to have the insights and the disciplines to understand a strategy and how to connect it to what we do, really to supplement the kind of top-down transmission process.

In this session, what I'd like to do is talk a little bit about what are the core concepts of strategy. This is not going to be a whole course, but it's going to be an effort to give you all the tools to think about strategy. Thinking about strategy is about thinking about the whole rather than thinking about the project or the function. Strategy is about thinking about the whole company—how does the whole company fit together?

Strategy is about thinking not about a particular technology or a particular competitor. Strategy is about thinking about the whole environment in which the company is operating, the whole circumstances outside that the company is having to respond to. That's what strategic thinking is all about.

What I find still today, despite the fact that this is a well-established discipline and there are lots of courses on it, is that strategy is relatively misunderstood in a lot of organizations. There's a lot of misuse of the word strategy; there's a lot of mistaken simplicity that people use when they talk about strategy.

So hopefully in this session today, we don't have a lot of time, but I'm very confident that in one hour, we can all get on the same page and really understand these fundamental principles. Hopefully, these will give each of you an opportunity to not just try to figure out what the top management wants done, but actually be involved in that discussion in a very proactive way. Many of you already are, but my goal today is that you're going to teach your bosses about strategy because you're going to know more about it than they do. That's hopefully what we can achieve today.

Now, the starting point for thinking about strategy is, you know, what is the fundamental—what are we really trying to do with strategy? What I find when I work with companies, and I get a chance to work with a lot of them in virtually every part of the economy, is that the very instinctive gut reaction about what are we trying to accomplish in this company, how do we win, is the idea of being the best.

You hear so many CEOs say, "We want to be the best company in our business. We're going to be the best bank. We're going to be the best auto company. We're going to be the best toothpaste manufacturer, the best IT vendor. We're going to be the best." That's our goal; our purpose is to be the best in our industry. If we're the best, we'll win, we'll succeed, we'll do well, we'll earn a good return. That's kind of the very typical way of thinking about competition and also about strategy.

Now, what does that mean for strategy? Well, if you're trying to be the best, then you have to figure out what's the best product, what's the best manufacturing process, what's the best supply chain, what's the best sales force structure, what's the best IT platform. The job of management, and those of you that are implementing, is actually to figure that out and get there. The assumption is that if you can do all those things and be the best, you will win.

What we come to understand is that's kind of a disastrous way of thinking about strategy. Why is it disastrous? Well, the first thing, and probably the most obvious thing about that way of looking at the world, is there is no best. There is no best auto company. The whole idea doesn't make any sense. You know, what's the best car? Is there a best car? No, it all depends.

It all depends on who the car is meant to serve. I mean, if the car is meant to serve a very high-net-worth person that is very tech-savvy and is full of themselves, that's a different kind of car than a utilitarian car for somebody who doesn't have a lot of money and wants to have good gas mileage. There are lots of good cars; there are lots of best cars. It all depends on the need and the customer you're trying to meet.

So the idea that there's one way to compete in any business is just simply not true. There are often many ways to compete; there are many different ways of delivering value for the customers you choose to serve. The job of the strategist is to figure out how you're going to do that better and uniquely.

Well, the essence of strategy is not about being the best; it's about how are we unique? How can we deliver some unique value? We'll talk about value a little bit later to the customers that we in our organization are trying to serve.

One of the truisms of competition and strategy is you can't meet the needs of every customer. You can't do that; it's impossible. If you try to meet everybody's needs, the chances are you'll not be very good at meeting anybody's needs. That's a very powerful idea in strategy. Strategy is essentially about competing to be unique.

If you find yourself in a situation where you're competing with your competitors on the same stuff, you're in trouble. Because if you're trying to produce the lowest price and they're trying to produce the lowest price, and you're in a race to produce the lowest price, what's going to happen? That's what we call a zero-sum competition. You're just going to have a race to the bottom and see whose returns are the lowest.

Whereas if you think about how to be unique, we find that there's more of a positive-sum competition where if you find the ways you can distinguish yourself and create advantage, and really double down on those, ultimately you'll be able to succeed, and your competitor might even be able to succeed as well because they're doing something else.

So these are some of the kind of animating fundamental ideas in thinking about strategy that we need to start with as we enter this discussion. These are questions that each of you needs to be asking as you think about the work that you're asked to do. You know, where are we going with this? Where do we ultimately want to end up relative to our competitors in terms of meeting the needs that our business is trying to meet?

Now, in addition to kind of the way we think about competition, another very important starting point for thinking about strategy is to understand what we mean by a strategy. You'd think this would be pretty clear at this point, but it's not. People use strategy to mean a lot of different things, and what we found is we've got to get on the same page. We've got to understand strategy in the same way if we're going to have a productive discussion, and that's whether it's your project team or whether it's your company.

There are three common mistakes in thinking about strategy that I see over and over again. One is to confuse the strategy with the goal. How many times have I heard, "My strategy is to be number one or number two in the business"? Is that a strategy? No, that's actually a goal; that's an aspiration. That's where you'd like to get. The strategy is what set of choices you make that will produce the competitive advantage that will enable you to be in whatever ultimate market position or growth rate you hope to achieve.

So we've got to make sure that when we think about strategy, we also have to recognize that strategy is ultimately holistic. It's not about any single action that you might want to take. So I hear people say all the time, "My strategy is to internationalize," or "My strategy is to be the technological leader." Those things may be terrific things to do, but those aren't strategies; those are actions that flow out of a strategy.

The strategy is kind of the holistic understanding of how the company is going to position itself in the business in order to get a sustainable, hopefully competitive advantage. That involves all the functions, and that's going to involve many action steps. Many of you are going to be asked to lead efforts around those action steps to actually make things happen that are critical to make the strategy real. But the action steps aren't the strategy; the action steps are embedded in a strategy, which hopefully is a coherent way of thinking about the company as a whole in order to distinguish itself in the marketplace and create that advantage that's going to lead to superior performance in whatever business you compete in.

We also have to be clear that strategy is a lot more than just a mission statement or a vision statement or a strategic intent. A strategy is very specific; it's very concrete. It's about a set of choices that the organization is making about how to compete, and those set of choices have to distinguish that company and separate that company from other players. That's ultimately what strategy is all about. It's about the whole; it's not about the parts. It's about the position, not about the action steps.

Ultimately, if it's successful, it's about superiority and uniqueness, which ultimately is what most of us would like to be part of—an organization that really distinguishes itself and delivers something really, really unique in the marketplace.

Okay, now, with that background, let's again first recognize that when we think about strategy, you've got to always understand that strategy exists on multiple levels. Unless the company's only in one business, the core level of strategy is what we call business strategy. That's how do we compete in a distinct business, a single distinct business? How do we compete in, you know, automotive lubricants if you're in a chemical company? That's business strategy.

But then if you're in a diversified company, you might be in more than one business. You might make not only lubricants for automobiles and passenger cars; you also might make lubricants for trucks, and you also might make lubricants that are used in industrial processes. Well, those actually turn out to be different businesses, and what we know is that you need a strategy for each different business in the company, and that's ultimately business strategy.

But if the company's diversified, you also need another level of strategy, which is, okay, how do we bring all these businesses together in a way that adds value? You know, what portfolio of businesses do we want to be in ideally that can leverage each other and amplify the advantages that they could create on their own? That's what we call corporate strategy.

I find that in many companies, we get these things confused, and we're not clear about what we're really talking about, and that creates problems—problems in terms of the choices, but also problems in terms of the discussion and the vocabulary and the clarity of the choices that we make.

I'm going to talk mostly today about business strategy because I think that's where most projects and programs emanate. They emanate out of a business strategy. Corporate strategy is a topic, though, that is important if you're in a diversified firm, and there are references here that you can look at if you're interested. I can't give that course today; I'm going to focus on the business strategy course, okay? Because again, I think that's where most of us are tethered in terms of what we do—the people in this room.

So how do we think about business strategy? Well, in business strategy, we've got to recognize that there's really two pieces of the understanding and analysis and thinking in business strategy. One piece has to do with the business itself, and that's what we call industry structure.

Now, if you compete in passenger cars, you're in the passenger car industry, and one important unit of analysis is what's the nature of that industry? How's it changing? Is it getting better or worse? How do we understand the dynamics of the industry? We find that industries are different in terms of their inherent attractiveness and profitability at any given moment in time. So that's kind of one piece—that's how do we look at the external environment in a kind of holistic way.

The second piece of business strategy, of course, is what we call positioning. Positioning has to do with how we decide to compete within the industry versus the other folks in that industry, and positioning is really fundamentally about how we can get a competitive advantage.

If we think about any company's profitability, you can actually decompose that profitability into two parts. One part of the profitability—say you have a profitability in ROI of 12%—one part of that profitability is the profitability of the industry, the average profitability of the industry. So say you're in a really lousy industry; say the average profitability is 8%. But the other part of profitability is the difference between your profitability and the industry average.

If you have a 12% ROI and the industry average profitability is 8% ROI, then you're 4% better, and that's a sign that you have a competitive advantage. You have a superior position; you're outperforming your rivals. Now, if you have a 6% ROI in an 8% industry, then you're doing something wrong. There are some weaknesses there; you're underperforming.

So you can see that part of your performance has to do with are you in a good or bad industry, but part of the performance has to do with are you better or worse? Are you superior or behind in that industry? When we look at performance, we have to look at it that way.

Again, I find a lot of companies get confused about whether the problem is a bad industry or a bad position. The remedies to those things are very different. If you've got an industry problem, that's a whole different animal in terms of what to do than if you've got a positioning problem. But both are very, very critical.

What I find over and over again is there's not enough attention to the industry. People gravitate right to their own position: do we have an advantage? Do we have a disadvantage? Rather than, is our business healthy? Is our business moving in the right direction? Because if the business is healthy, we'll be healthy. Now, maybe we can be a little healthier than our rivals, but ultimately what matters is our return on capital, our overall performance.

So now let's burrow down a little bit into these two pieces. Again, some of these ideas many of you are familiar with, but I'm confident that talking about this in this way is hopefully going to help you see it in a much more powerful light than whatever you remember if you read or studied something about this.

Now, on the industry side, of course, a long time ago, I introduced this concept of industry structure and the five forces. There's been an analyst debate about whether there's a sixth force, and if somebody invents one, you know, I'll be very happy to give them a gigantic prize or reward. So far, we think there's five forces.

Whenever you're looking at a business holistically, the way to organize the nature of competition is to recognize that it's taking place through these forces. The most obvious one is the rivalry you're having with the people in the industry—General Motors versus Ford, Google versus Yahoo in search engines. That's rivalry; that's obvious; that's kind of intuitive. We all know about that kind of competition.

What we are less often aware of is actually that our real profitability may not be driven so much by that but by these other forces of competition: the clout that our customers have to force down the price, to ask for more that we can't recover the cost of. So that's the bargaining power to buy.

Then there are the suppliers that we deal with who may have the clout to push up the price of what they sell us and pull the profitability out of the industry. Then there's a question of do new companies come in and kind of take market share and drive down the return in the business, and that relates to the concept of barriers to entry.

I think hopefully a concept that all of you are familiar with. The barriers to entry are high; you can support a very high-profit industry. If the barriers to entry are low, you can't. So this becomes a critical element of thinking about the industry structure in which you're competing.

Then there's the substitutes—the other ways of doing what you do. So if you make plastics, then you know the substitute may be metal or some other material. Even though it's not a direct rival, it also competes with you. If the substitute has a favorable price-performance situation versus your product, even if it looks totally different, that's going to limit your profitability.

Industry structure then is about seeing what's happening in the broader competitive environment around you, the directions that it's taking, and then playing that into your thinking about the question of where you want to compete. Industry analysis then becomes a core discipline of strategy, and every good strategist has to know what's going on in their industry. They have to see it in this holistic way, and ideally, they have to build it into choices that are made that ultimately are going to affect you in terms of priorities and programs that you're going to be asked to deliver on.

Now, let's take a little bit of an example here just to give us all a chance to kind of see how this thinking can play itself out. So I just thought I'd take a very simple industry—industrial gases. These are products from companies like Air Products. Hopefully, some of you have heard of these companies. They supply oxygen, nitrogen—just gases that are used in various ways in the business operations of many industries, sometimes in the production process, sometimes in other ways.

By definition, these products are literally commodities. Oxygen is oxygen; nitrogen is nitrogen. The feedstocks for these industrial gases are huge commodity markets. So the companies in this industry have no control over the raw material price, and they're just kind of at the whim of whatever's going on in the raw material market in terms of affecting the price.

Industrial gas companies sell to many of the biggest companies in the world. So your first instinct is, well, you know, here's an industry; it's a commodity industry with no power over your key raw material cost, and you're selling to a lot of big, powerful companies. Sounds pretty lousy. That's the kind of thinking that comes out if you don't think rigorously and systematically about your business.

If you do, what you realize is this actually is a very attractive industry. Why? Because yes, they're dependent on feedstock prices, but the way this industry has figured out to contract, the raw material price swings are built into the contracting so that just gets passed through. They're not vulnerable to that.

It turns out that although these are commodity products, actually in many cases, the gas supply is on-site. There's a little tiny little plant that's generating oxygen or generating some gas that you need in your production process, and basically, it's there on your factory site. In order to kick out one of the competitors, you've got to kick out their whole little mini plant in your production process, and it's often contractually impossible to do that. You have a two- or three-year contract before they would put that asset onto your facility.

It turns out that to the extent that you're delivering gases, it's very expensive to deliver gases. So the density of your customer is very, very important—how far the truck has to drive between dropping off the next tank of gas. If you have tight density of customers and you can build that up, it's almost impossible for a new company to come in because it's just horrendously expensive for them to serve one customer in a given region.

So to make a long story short, here's an industry that if you really understand your industry environment and think about it in this more rigorous way, you all of a sudden understand, first of all, it's pretty attractive. But you also understand the ways in which your company and your projects and your programs might actually extend that advantage and deepen that advantage because the advantage really comes from delivery efficiency and embedded on-site facilities and things like that that you may be able to invent better and important improvements in how to do that.

So industry analysis becomes a critical dimension, and I think every good project manager has to understand the industry context that's given rise to the requirements that have then popped up in this project that you've been asked to lead and the results you've been asked to deliver. If you don't feel like that understanding is there, you've got to raise your hand and say, "Wait a minute, boss. This is the way the industry is going. This seems to be what's happening with the customer. Why are we doing this? This is just going to make us a commodity and take away our opportunity to differentiate ourselves. Why don't we think about this?"

See, that's that ability to have a dialogue between the kind of strategy level and the program and project level rather than have two different worlds where there's some kind of a handoff at some point, and then it goes off on its own without the ability to understand, without the ability to get feedback loops, without the ability to refine what we're really trying to accomplish here in a dialogue.

I think as a project leader or project manager, you're not going to be very good at that dialogue unless you understand some of these broader concepts of strategy and the nature of competition in your business.

Now, let's turn to positioning. How do we position ourselves within the industry? What are the key ideas there? Well, the first idea is that the fundamental purpose of positioning is to get superior performance. We're not positioning for its own sake; we're positioning because we want to do better economically or in delivering value for the customer if we're not in a business than our rivals.

In order to do better, in order to be more profitable, in order to deliver higher economic value, we only really have two ways of doing that. One is we've got to be able to command a higher price. If we can command a premium price for our product or our service and we can keep our costs in control, we will be more profitable. That's one route to superior profitability, which again ultimately is what strategy is all about.

The other way we can be more profitable is we can have lower cost because we're inherently more efficient at doing the things that are necessary in the business. If we can have an acceptable product and we can deliver that acceptable product at a lower cost, again, we will be more profitable. These are the two paths to superior profitability: a higher price or a lower relative cost.

Once in a while, we can do both, but it turns out to be really hard because the things that are required to get superior value and a premium price are often somewhat inconsistent with the things that you want to do to actually minimize in the cost. So usually, we have to make a choice. We have to decide what are we trying to be. Are we trying to be what I call a differentiator—unique value, unique performance, unique features, unique services, higher price? Or are we trying to be a cost leader—good product, good enough quality, good enough features, really efficient, really cost-effective price, maybe even a discount, but we're so efficient that we can make money even if we give a discount?

So this is where we start with positioning: how are we going to translate this into superiority—higher price, lower cost?

Now, in order to understand that and actually make that real for the company as a whole, we need the next kind of key tool here, which is the idea of the value chain. Now again, hopefully, everybody here has heard of the value chain. Basically, the value chain is sort of a systems view of a business. It says that what a business is, whether it's making cars or doing accounting services, a business is a set of activities—it's stuff that we're doing.

This framework called the value chain is just a simple way of kind of articulating and understanding and breaking out the essential activities in the business. This particular picture is sort of a generic starting point, but of course, every business is going to be different. It's going to have different activities; it's going to have different names for those activities. In manufacturing, there's going to be a manufacturing part; in service delivery, there's going to be a service delivery part.

This gets tailored to the particular business, but ultimately, the concept is the same. In every business, we have a value chain, and everybody working in the company is somewhere in that value chain doing something. There are some categories of different kinds of things that people do. They do HR, and they develop new products in technology development, or they do logistics, or they process orders. That's what companies do.

All competitive advantage comes from the value chain. You have a competitive advantage because you can do things here cheaper because you've learned how to do them more efficiently. Say you've learned how to provide after-sales service really, really efficiently—with fewer people, with fewer repeat visits, with a greater ability to fix the product on the first visit. Your competitive advantage might come from your ability to do after-sales service better.

Your competitive advantage might come from your product development, which creates distinctive features that nobody else has or product performance that's better than anybody else has. So your competitive advantage might come from the technology development, product development part of your value chain. In general, it can come from any part of the value chain.

Actually, what we find is that companies that can multiply places in the value chain where they actually draw their advantage—those kinds of companies often do really, really well because it's harder to copy; it's harder to imitate if you're drawing advantage from multiple things that you've learned how to do well.

As we'll see later, it's even more powerful if you've got multiple things that you can do well and they're actually reinforcing each other. They're connected; that's called fit, and we'll come back to that in a minute. All competitive advantage comes from the value chain. If somebody's willing to pay you a premium price, it's because of something you've done to justify it—on-time delivery, better design, higher quality, salespeople that provide more value-added and customer support in the sales process.

You can always trace every advantage to the value chain, and of course, many of your projects and programs are connected to some part of the value chain.

Now, how do we get competitive advantage in either price or cost? Well, there are basically two ways of thinking about that, and this is a very, very important distinction that every one of us has to understand all the time. Part of our ability to be high quality and/or low cost comes from what I like to call operational effectiveness.

Operational effectiveness is basically just doing things well. Another way of saying it is operating at best practice. Okay, so, you know, let's take the computer infrastructure, IT infrastructure in the company. You know, the traditional way of doing it was you had servers in your, you know, IT—the place where you had all your IT stuff. I don't know what you're calling it; I was going to call it a computer center, but I think that's kind of an archaic idea.

Now today, what we know is if you're still just doing servers, you're not at best practice. Now you need to be on a cloud. Okay? That's a best practice. Operational effectiveness is figuring out that the server isn't where we need to be anymore; we need to be on the cloud. There are hundreds of things like that going on every single day all across the business. There are new ways of doing things—new technology, new machines, new IT configurations, new human resource concepts, new Salesforce incentive models. People are inventing best practices every day, and you know, job number one for managers is we've got to validate them, and then we've got to do them.

If we're not operationally effective, if we haven't gone on to the cloud, etc., actually strategy doesn't matter. If we're giving up cost and quality by just not keeping up with ideas and concepts that are validated as better ways of doing things, we're going to lose.

But what's interesting is that just being operationally effective—just assimilating best practices, just kind of rapidly adopting the latest good ideas—usually doesn't allow you to get a competitive advantage. Maybe for an instant, but if it's a best practice, what's going to happen? Everybody else is going to do it, and of course, the vendors are going to be frothing at the mouth to spread this best practice to every single customer, including your competitors.

So yes, we've got to work really hard at driving best practice and driving operational improvement, and some of your projects and some of your programs are just about this. We know we've got to make the migration to the cloud; let's do that. We've got a project team; we're going to get that done. In that case, your path is pretty clear, and in a sense, what you've got to understand is you have a pretty fixed target, and you've got to think of it externally in terms of what best practice is of companies like yours.

But best practice improvement is not strategy. Strategy is something different than that. Strategy is not about doing the same things better or getting more fast adoption to best practice. Strategy is actually about choosing to do things differently. Strategy is about the things that aren't best practice. Strategy is about the things over which you must choose, and what you want to choose is how you're going to distinguish yourself and where your advantage is going to come from.

It's not going to come from best practice improvement because people are going to follow you. If you happen to get in the lead, it's going to come from choices you make about how to be unique, about what position you want to occupy in your business relative to your competitors, and that's where ultimately sustainable advantage comes from.

Okay, many of your projects—people sitting in this room—are about this. They're about something that's going to contribute to your uniqueness and to your distinctive position, and therefore it's probably going to not have such a clear endpoint, not have such a clear reference point in terms of what ultimately has to get done, but it's going to be profoundly important to the future prosperity of the organization.

Okay, so learning how to think about these two things as different animals—both critical but different animals—I think is very important to do what you do well.

Now, let's focus on the unique positioning. What do we need to do to create a successful strategy? Well, again, this is very complicated, but ultimately there's a set of underlying concepts here about what a successful strategy looks like, which I think are very powerful in allowing you to actually think about the process of the question of whether you're on a good path, whether you're moving in a direction that's likely to be robust and sustainable.

Question number one is that every good strategy has a unique value proposition for the customer—the customer that you're seeking to serve. That's kind of step number one. What's a value proposition? Well, for strategy purposes, it has three elements.

One is what customers are you actually serving? Of all the customers in your space, which ones are you really going after? Now, you could say all of them; you might succeed that way. Or you might say, "Really, I'm going after the customers that want industrial-strength quality." I'm going after the customers who just want a good basic product at the lowest possible price and costs that we have to achieve.

The first question in value proposition is who are we really going after of all the people in the industry? We can think about the end user; we can think about the channels; we can think about them both together in asking that question.

The second question in value proposition is what specific needs of those customers are we actually trying to meet? Are we trying to meet all their needs in our product category? Are we trying to really meet a particular subset of those needs? What exact needs are we trying to meet to make ourselves distinctive, to make ourselves unique?

You know, we're going to be just as good on these areas, but we really need to identify these three areas, and we're going to be better. So that's a second question.

Then the third question has to do with how does that translate into what price we ask relative to our competitors? Are we going for a premium price? Are we sort of parity? Are we going to offer a discount?

When we put these three questions together, we end up with the value proposition. Strategy theory says we've got to answer these questions differently than our competitors are answering them because if we're trying to meet the same needs of the same customer at the same price, we don't have a strategy. We're competing on operational effectiveness—who can do the same thing better.

Operational effectiveness is important, but it's not easy to win that competition. So that's hopefully—we all understand that's a bad place to be. Operational effectiveness is table stakes; we build strategy on top of that, and hopefully, you make clear choices accordingly.

Now, all of this works best when you illustrate it with an example. Let me use an example that I think everybody here probably knows pretty well, and that's IKEA. Depending on whether you're European or American, I'll let you all guess which is which. This is a furniture retailer—a very, very famous company that really burst onto the scene maybe 30 years ago plus and is now a global powerhouse.

Why have they been so successful? Well, because of their strategy. They're not just doing the same thing as all the other furniture stores; they're not just trying to do the same thing better. They made a set of choices about how they were going to have and deliver unique value.

It really started with a view of who the customer is. Most good strategies that are really powerful strategies embody an insight into how to think about customers that's different than people had thought of in the past, and IKEA is no exception here.

You know, typical customer segmentation: rich customers, poor customers, urban customers, rural customers, large families, small families, big houses, small houses. There are lots of different segmentation schemes in most every business that sort of exist. But IKEA figured out that there was a very interesting segment that nobody had identified that turned out to be really big, which is people in general that lived in smaller spaces—apartments, dorm rooms—people that were educated and sophisticated enough to want nice design and style for their furnishings in their home, but people that had really, really limited budgets.

So the traditional way of meeting this segment's needs—well, first of all, nobody could meet it. But if you wanted really cheap furniture, what would you do? You bought used furniture; you went to the Army Navy Store. But IKEA figured out that there was a big market here, and there was a big market particularly if you could have high-style products that were well-designed, that had good materials, that were coordinated into collections, which allowed people to have a nice environment in their home—things that work together and fit together.

If they could figure out how to do that and meet that really low price point, they would potentially have something big on their hands. Again, traditionally, there was this trade-off between high style in design and price. If you wanted good design and good style, you had to pay a lot. IKEA said, "Well, what if we could figure out a way to deal with that with the additional sophistication of understanding that there are these customers with relatively small living spaces and people that have money but also actually care about the style that we can target?"

That's a value proposition, and it turned out to be very, very novel. But the value proposition alone doesn't get you to the goal line. You've got to find a way to configure the value chain in order to realize the value proposition in a way that competitors cannot.

You know, the value proposition is sort of a concept, but configuring the value chain makes it real. In the case of IKEA, that actually involves some powerful innovations. I don't know the company well enough to know whether they had a project team, but the critical innovation they had was modular. They realized that the economics of furniture are that it's bulky and it's very expensive to ship relative to its value.

What they figured out is if we can actually not ship furniture, we can get a giant amount of money, and we can reinvest that money in things like style, design, fabrics. So what they ended up doing was they ended up designing furniture that was easy to assemble and disassemble.

So when you go to IKEA, as you all know, you don't buy furniture; you buy a box in which are contained pieces of furniture. Of course, the shipping from the factory—they're not shipping furniture from the factory to the store; they're shipping boxes. Those boxes are going into this giant warehouse in the store.

So when you go into the store, you don't see what you're going to buy; you see stuff they've put together in the store. But then when you go to take it away, you don't actually get a piece of furniture; you get a box, which you schlep to the parking lot and put in your car. Then you take it home, and then you have a Christmas-like experience of taking it home and assembling it on-site.

But it turns out that we get through it; it's not that hard because they've designed it that way, and that was a strategic innovation. But it all started with who is our target customer and what's our value proposition going to be. From there, they developed a whole value chain.

So just about everything IKEA does is fairly different than most other furniture stores. For example, what I always found amusing is you'd go into IKEA, and you get lost. I mean, there's not a linear thing in there in terms of getting in, getting out, finding where you're going.

The next thing I noticed about IKEA was if you need help, God help you. There is no help. There is no help. If somebody has an IKEA shirt on and you look their way, they scree away. It's the opposite of Whole Foods. You know, in Whole Foods, you go in there, and you even show mild interest, and somebody grabs you and says, "Oh, isn't this wonderful? What would you like to know? What could I do for you?"

IKEA is completely different by design. Why? Because they need to take any cost out that doesn't actually contribute directly to that unique value proposition, which is the furniture itself and its inherent quality. It's not the shopping environment; it's not all that stuff. They put all the money into the actual quality of the design, the materials. That's where they put all their money.

So the sales help—they have great online, and they have great little displays and videos in the store and lots of self-service type stuff. But pretty much everything they have is there in the store. You can look at it, and you know what is there to say about a table? Oh, here it is, and it looks like, "Oh, is it big or small?" Well, here, look, you know, what are the measurements? Oh, well, here they are; they're written down.

So just write them down; there's a little card that tells you the measurements. You don't need sales help. We could go through the whole value chain—logistics, the parking lot, the store location, the child care on-site, the whole nine yards. Everything about that value chain has been designed to deliver this value proposition.

So that is really the number two key success factor for a strategy: have you engineered a distinctive way of competing, a distinctive value chain in order to deliver what you're going to be different at in a unique way and succeed at that?

The third key concept in strategy is the concept of trade-offs. A trade-off is something that most engineers, you know, we like to break trade-offs. But ultimately, in strategy, a lot of the power of strategy comes from actually recognizing that there actually are some trade-offs and that we should actually be willing to make them.

So let's take a trade-off like IKEA made. A lot of people would like to have, "Well, I want this size of this particular sofa," or "I'd like to change the fabric," or "Maybe I'd like to have a different color." IKEA says those are all perfectly valid needs—fine. It's just that we don't do that.

The concept of trade-offs is that in order to be uniquely good at delivering some kinds of value, you have to be deliberately willing to choose not to offer other kinds of value. All great strategies involve these trade-offs, and the companies that fail are the ones that aren't willing to make them.

You know, if there's any living and breathing human being that has a need, they'll try to meet it rather than say, "No, no, no, these are our target customers; these are the needs we really care about meeting. Let's optimize on those, not on doing the other things."

One of the most important principles of strategy in virtually every industry I've worked in is the following, and it's going to sound maybe a little weird when I say it: a great strategy involves making customers unhappy.

Okay, now that's a little bit of a trick. The essence of strategy is knowing which customers you want to make really happy by meeting their needs and then not worrying that you can't please everybody. You know, if somebody comes into IKEA and wants sales help, that's a perfectly valid thing. It's okay to want sales help.

So suppose they don't see any sales help, and they get really mad, and they go to the—they go get a comment card, you know, and they write down, "Well, I hate you! I hate you! You have no sales help!" Should IKEA care about that comment? Of course not; that's not what they do.

But yet so much of activity in so many companies is tied up kind of trying to do customers sad and pleasing everybody and analyzing the comment cards and not realizing that actually half of the comment cards are the bizarre people that really shouldn't be there. You know, it's like somebody who complains to Southwest Airlines that they don't have first class.

So again, strategy is fundamentally about choice. It's about choosing who you're trying to deliver value for; it's choosing how to configure your activities in the business in order to actually achieve that, and it's choosing what not to do.

Now let me ask a question here, and everybody should get a—we should get a hundred on this. Everybody should get this: Is IKEA the best furniture company? No way! You know why I know so much about IKEA? My daughter, Lana, my oldest daughter, went to the University of Pennsylvania, and every single time I went to visit her—oh no, one out of two times—she would say, "Dad, could you rent an SUV to get in from the airport?"

I said, "You know, Lana, for you, anything." And it turned out that the reason she wanted me to rent an SUV was she wanted to go to IKEA. So, you know, five, six times over the course of an academic year, we would go to IKEA, you know, driving in our SUV, and she would go in and shop, and she'd order—have gone online; she knew what she wanted.

She'd go to the—she'd somehow figure out where to go in the store to find it. We would pick up our tag; we would go to the warehouse; we would pick up the box; we would schlep it into the SUV, and this was a ritual. Okay? She loved that company. That company spoke to her. I hated it! I really did!

I mean, I can't imagine ever buying anything at that place. I don't like almost anything about it. I don't want a box; I want help. I want the color. I want, you know—see? So there is no best. There is no best way to compete.

Yet so many companies get so tangled up thinking that way. So hopefully, all of us, as we think about what we're trying to do in our projects and in our programs, will kind of have this insight into how to understand the strategy in which what we're doing is embedded, and we'll help enhance the dialogue with our senior management to make sure we have clarity on what that is.

You're going to find a lot of senior executives that don't think this way. They're not at this level of clarity and sophistication in their strategic thinking, and you're going to need to help the company to have a good outcome.

A couple of other key tests: integrating the choices across the value chain. This is something really critical that many good projects and programs do. They gather people across functions and connect the dots. IKEA is a great example of that. The kind of various pieces of the strategy actually are designed to be reinforcing, to feed off each other, to leverage each other.

Then the final kind of key test of a strategy is continuity. What we understand about strategy is if you're zigging and zagging and shifting your positioning all the time, you'll never win. You've got to make, in a sense, a bet. You've got to have some continuity of what's my positioning, what's my value proposition, who am I trying to serve, and how am I engineering what I do to best do that?

Because if you don't have that continuity, if you're not teaching your colleagues, if you're not teaching your employees, if you're not educating the customer, if you're not working collaboratively with the supplier, and everybody doesn't understand who you are and what you're trying to be, it's very hard to win.

A lot of people have kind of strategy dour, you know, "Oh, let's do service this year," or whatever based on whatever trends there are in the external environment.

One kind of broad way of thinking about all of the stuff that I've been talking about is, you know, what kind of competition are you in? So many companies get themselves into what you might call a zero-sum competition where pretty much they're doing the same thing. Products are similar; the features are similar. If one guy does something, the other guy kind of imitates it.

The zero-sum competition is where you're doing pretty much the same thing, and when that happens, what happens? The price goes down. It's very hard to win, and profitability goes away in the business. Ultimately, even if you have a higher market share, you might not even make much money.

What we want to be is we want to ideally create a positive-sum competition. That doesn't mean little competition; that just means a different kind of competition in which you're carving out the space that you want to dominate and win in, and you're making choices which, if you're consistent about them and robust about them and creative about them, will allow you to separate yourself from rivals.

I know all of you can think of dozens of company examples that both show the bad and the good and the ugly of strategy because we all live it in our own experience.

A couple of final points, and then we'll open it up for questions. If the benefits of strategy are going to be realized in any organization, the strategy can't be a secret.

Now, you know, in the old days—and I'm old enough to know the old days at this point—in the old days, strategy used to be something where you had confidential copies of the strategy documents, and only a few people were allowed to know. That's partly because they had the wrong idea of strategy. It was about, you know, are we introducing this new feature? You know, that's the way, and that we want to keep that secret.

There is a need for security and confidentiality in technology, and I accept that. But ultimately, at the strategy level, what's our value proposition? What are the core customers we're trying to serve? What are the fundamental needs we are going to be uniquely better at meeting? Those kinds of things need to be well understood deeply in the organization.

I have a course that I do at Harvard—a little intensive kind of CEO boot camp for CEOs of very large companies—and one of the things we talk a lot about is that one of the fundamental jobs of a leader is to be the strategy teacher, the strategy professor that's communicating over and over again, "Okay, who are we? Who are we trying to serve? How are we trying to succeed? Who's our target customer? What's our value proposition?"

It's repeating that over and over again because that's got to permeate the brains of lots of different people that are doing product development, that are out there selling the product every day, that are doing customer support.

So communicating strategy is really, really important, and I think that you all involved in actually making strategies real have to amplify and improve that communication. That's a key part of your job.

This slide gives you a few other thoughts about that process of strategy communication. But ultimately, at the end of the day, strategy is the responsibility of leadership up and down the organization.

We've got, as leaders—and you are leaders—we have to distinguish operational improvement and strategy. We've got to keep those things straight. We've got to understand these key principles. If you're running a business, then you are the one that has to make, at the end of the day, some of these choices.

Communicate consistently and relentlessly what your strategy is. Maintain discipline. You know, one of the things that happens in organizations day after day is ideas bubble up. People have thoughts; investment bankers come to you with deals; vendors come to you with new stuff.

If you're not careful, there will be no strategy because you'll end up doing all kinds of different things, and they'll all ultimately not be aligned. So I like to say strategy is tested every day—whether you're clear, whether you understand your trade-offs, understand the choices you made, and stick to them unless something cataclysmic happens and you have to change your strategy.

But in most organizations, that doesn't happen very often if you've been thoughtful and careful and rigorous about your business.

Okay, well, let's open up for questions. Again, what project and program managers do is embedded in strategy. The degree to which you can both improve the connection and understand the connection is going to have a big impact on the ultimate power of whatever it is that you're running.

But I also want to just emphasize one more time that your job is not just to be a passive recipient of top-down guidance about these ideas. Your job is to help make it a two-way process of deepening and understanding so that the organization gets greater power, greater clarity, and ultimately greater performance.

Okay, so let's get Mark back up here, and we'll have some questions. Thank you. Great job! Thank you.