What is Strategy Michael Porter HBR NovemberDecember 1996

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. n Operational effectiveness (OE) productivity, speed, quality - and strategy are both necessary for superior performance n

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

The Basics - 2 Differentiation: created by the choice of activities and how well performed n Strategic Positioning: means performing different activities from rivals’ or performing similar activities in different ways n Operational Effectiveness (OE): means performing similar activities better than rivals n

Superior Profitability Delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average unit costs n Differences in operational effectiveness (OE) are importance differentiators in profitability among rivals as OE directly affects relative cost positions and levels of differentiation. n

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

Productivity Frontier - 2 n n OE competition pushes the productivity frontier outward OE competition produces absolute improvement in firm performance yet no relative improvement between surviving competitors. Leads to selfinflicted wounds i. e. hyper-competition, zero-sum competition, static or declining prices and lower profitability.

OE Programs n n n TQM Time-based Competition Benchmarking Learning Organization Outsourcing Empowerment n n n Continuous Improvement Virtual Organization Forms Best Practices SQC Change Management

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

Competitive Strategy Being different in the marketplace from rivals n Deliberately choosing a different set of activities to deliver a unique mix of value n The essence of strategy is in choosing to perform activities differently, or to perform different activities (or both), than rivals. n

Strategic Positions n 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 n 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. n All positioning is a function of differences on the supply (activity) side but not necessarily on the demand (customer) side. n

Strategic Positions - 4 Sustainability of position requires trade-offs n Trade-offs occur when activities are incompatible; more of one thing requires less of another n Trade-offs arise for 3 reasons: n – 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 n Valuable position attracts imitators based on: n – 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 n 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. n Without trade-offs, a sustainable competitive advantage cannot be achieved. n Strategy is about combining activities whereas OE is about excellence in individual activities or functions. n

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

Strategic Fit = seeing the company as a system not just a collection of core competencies, critical resources, and key success factors. n 3 types of strategic fit (the whole matters more than any individual part): n – 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. n Strategic positioning sets the trade-off rules that define how individual activities will be configured and integrated. n Organizational structure, systems, and processes need to be strategy specific. n

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