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: Statistical Quality
• Empowerment control
• Change Management
 Competitive Convergence
• The more rivals copy and imitate OE ‘best
practices’ the more they begin to look the
same.
• OE imitation leads to strategy convergence
and competition becomes mutually
destructive leading to wars of attrition (lose-
lose). Leads to M&A activity(mergers and
acquisitions ) 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