What is Strategy?

Michael Porter
HBR
November/December 1996
OE Does Not Equal Strategy

 Management tools (i.e. benchmarking, best

practices, outsourcing) have taken the place
of strategy.
 Operational effectiveness (OE) -
productivity, speed, quality - and strategy
are both necessary for superior performance
The Basics

 Strategy: the creation of a unique and

valuable position involving a unique set of
activities; being different
 Activities: the basic units of competitive
advantage
 Competitive Advantage: grows out of the
entire system of activities; capacity to
outperform rivals by establishing a
difference it can preserve over time
The Basics - 2

 Differentiation: created by the choice of

activities and how well performed
 Strategic Positioning: means performing
different activities from rivals’ or
performing similar activities in different
ways
 Operational Effectiveness (OE): means
performing similar activities better than
rivals
Superior Profitability

 Delivering greater value allows a company

to charge higher average unit prices; greater
efficiency results in lower average unit costs
 Differences in operational effectiveness
(OE) are importance differentiators in
profitability among rivals as OE directly
affects relative cost positions and levels of
differentiation.
Productivity Frontier

 Sum of all best practices at a given time

 The maximum value that a firm can provide
at a given cost using best practices
 As OE improves within a firm, it moves
closer to the productivity frontier.
 OE is necessary for superior profitability
but not solely sufficient. Rapid diffusion of
best practices reduces long-term impact of
OE on profitability.
Productivity Frontier - 2

 OE competition pushes the productivity frontier

outward
 OE competition produces absolute improvement
in firm performance yet no relative improvement
between surviving competitors. Leads to self-
inflicted wounds i.e. hyper-competition, zero-sum
competition, static or declining prices and lower
profitability.
OE Programs

 TQM  Continuous
 Time-based Improvement
Competition  Virtual Organization
 Benchmarking Forms
 Learning Organization  Best Practices
 Outsourcing  SQC
 Empowerment  Change Management
Competitive Convergence

 The more rivals copy and imitate OE ‘best

practices’ the more they begin to look the
same.
 Leads to imitation (consultants as seed
sowers) and homogeneity.
 OE imitation leads to strategy convergence
and competition becomes mutually
destructive leading to wars of attrition (lose-
lose). Leads to M&A activity as end-game.
Competitive Strategy

 Being different in the marketplace from

rivals
 Deliberately choosing a different set of
activities to deliver a unique mix of value
 The essence of strategy is in choosing to
perform activities differently, or to perform
different activities (or both), than rivals.
Strategic Positions

 Variety-based: produces a subset of

industry products/services; based on the
choice of product/service varieties rather
than customer segments; viable when a firm
can best produce particular
products/services using a distinct set of
activities. Serves a wide array of customers
but only a subset of their needs.
Strategic Positions - 2

 Needs-based: serves most or all of the

needs of a particular group of customers
with a tailored set of activities; differences
in needs will not translate into meaningful
positions unless the best set of activities to
satisfy them also differs.
Strategic Positions - 3

 Access-based: segmenting customers who

are accessible in different ways; access can
be a function of customer scale or
geography - anything that requires a
different set of activities to reach customers
in the best way.
 All positioning is a function of differences
on the supply (activity) side but not
necessarily on the demand (customer) side.
Strategic Positions - 4

 Sustainability of position requires trade-offs

 Trade-offs occur when activities are
incompatible; more of one thing requires
less of another
 Trade-offs arise for 3 reasons:
– inconsistencies in image or reputation
– different positions require different activity sets
– Internal focus requires priority setting - can’t be
all things to all customers successfully
Sustainable Competitive
Advantage

 Unique position does not guarantee a

sustainable competitive advantage
 Valuable position attracts imitators based
on:
– matching superior performance factors.
– straddling: match the benefits of a successful
position while maintaining existing position;
graft new features, services, or technologies
onto current activity set.
Sustainable Competitive
Advantage - 2

 Positioning trade-offs are essential in

effective strategy:
– creates need to choose and purposefully limit
what a company offers
– deters straddling or repositioning of rivals as
competitors that engage in these activities
undermine current strategies, degrade value of
existing activities, and spread resources too thin
(trying to be all things to all customers)
Sustainable Competitive
Advantage - 3

 The essence of strategy is choosing what

not to do.
 Without trade-offs, a sustainable
competitive advantage cannot be achieved.
 Strategy is about combining activities
whereas OE is about excellence in
individual activities or functions.
Strategy & Systems Thinking

 Strategy involves a whole system of

activities, not a collection of parts.
 Competitive advantage comes from the way
activities fit and reinforce one another
(think horizontal & process management
here!).
 Strategic fit among activity sets locks out
rivals; synergy creates competitive
advantage & superior profitability.
Strategic Fit

 Fit = seeing the company as a system not

just a collection of core competencies,
critical resources, and key success factors.
 3 types of strategic fit (the whole matters
more than any individual part):
– simple consistency between each activity
(function) and the overall strategy
– activities are reinforcing
– optimization of effort
Fit & Sustainability

 As fit becomes more complex (multiple

interrelationships) within a firm, the more
difficult imitation is.
 Strategic positioning sets the trade-off rules
that define how individual activities will be
configured and integrated.
 Organizational structure, systems, and
processes need to be strategy specific.
Role of Leadership

 Focus on creating distinctiveness

 Make tough decisions on trade-offs
 Define the company’s position
 Manage the entire system to create fit
 Focus on the long term
 Stewardship of corporate strategy