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May 1, 2006

It’s Time to Think Anew About Strategy

In his writings on competitive strategy, Harvard University professor Michael E. Porter declares that two central questions influence the strategic direction of companies.

The first is whether your industry has the potential for long-term profitability. “The winner in a fight for share in an unattractive industry may not be profitable, and the fight itself may make industry structure worse or erode the winner’s profitability,” Porter says. In some industries, the underlying economic and technical characteristics of the business may make it relatively easy to be profitable. In others, sufficient profitability may be impossible, he writes.

The second issue revolves around each company’s own competitive position. In Porter’s view, the two basic types of competitive advantage are cost leadership and differentiated products and/or services. Competitive advantage “grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it,” he writes.

Porter’s concepts arguably are more important to us now than ever before. These are good times for the metals industry, but the rules of competition are changing rapidly as the industry consolidates. As the professor would put it, the bargaining power of customers has been altered substantially as metals producers have consolidated and become more profitable and disciplined. The business model of making money by playing weak or even bankrupt producers against one another in an environment of metal surpluses is no longer viable. Today’s most-profitable metals companies offer combinations of products and services that squarely address individual customer requirements.

Equally important is the need to establish stronger bonds with your suppliers. Just as your best customers make their needs known to you, your suppliers will do their best job when they understand the target and know you personally. For some metals operators, the need to get closer to suppliers is a new but essential phenomenon that results from the higher levels of market discipline shown by the fewer, stronger companies in the supply chain.

In the day-by-day rush to respond to immediate market needs, it is not easy to find time to consider alternate strategies, make improvements to existing strategies or even gain perspective on the larger market picture. But as industry leaders and operators of companies that are doing quite well now, you must take time to consider how you will make money when the down-cycle returns. What strategies and tactics will you use to stay healthy, strong and growing?

Abraham Lincoln, in his annual message to Congress in December 1862, said it simply and well: “The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with new difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew.”

These words presaged the Emancipation Proclamation, issued one month later.

I don’t for a minute compare metals industry business models with the Civil War. But the basic strategic idea is the same. As we confront our business issues and study winning strategies, I can do no better than to follow Lincoln’s lead: Loosen your mind. Confront today’s reality. Let freedom ring.