What Is Strategy? Key Notes (Porter, 1996)
I. Operational Effectiveness Is Not Strategy
- For almost two decades, managers learned to follow a new set of rules: be flexible, respond rapidly to changes, benchmark to achieve best practice, outsource aggressively, and nurture core competencies to stay ahead.
- Positioning—once the core of strategy—is deemed too static for dynamic markets and changing technologies. Rivals can copy market positions quickly, so competitive advantage is perceived as temporary.
- True, some barriers to competition fall as regulation eases and markets globalize. Companies become leaner and more nimble. But hypercompetition can be a self-inflicted wound caused by failing to distinguish OE from strategy.
- The root problem: failure to distinguish between operational effectiveness (OE) and strategy.
- OE is necessary but not sufficient for superior performance; both OE and strategy are essential to profitability.
- Management tools and techniques proliferate (e.g., total quality management, benchmarking, time-based competition, outsourcing, partnering, reengineering, change management). OE improvements can be dramatic, but they often fail to translate into sustainable profitability.
- Over time, management tools can supplant strategy, pushing managers to improve on all fronts rather than to secure viable competitive positions.
- OE and strategy interact: OE improvements can generate short-term gains, but without a distinctive strategy, profits may stagnate or erode.
II. Strategy Rests on Unique Activities
Strategy is about being different: deliberately choosing a different set of activities to deliver a unique mix of value.
The essence of strategy lies in the activities—either doing different activities or performing similar activities in different ways.
A sustainable strategic position requires choosing activities that are different from rivals' and configuring the value chain to deliver a distinct mix of value.
The productivity frontier concept:
- Imagine a frontier that represents the maximum value a company can deliver at a given cost, using the best available technologies, skills, management techniques, and inputs.
- When a company improves OE, it moves toward the frontier; the frontier shifts outward as new technologies and inputs become available.
- Examples updating the frontier: laptop computers, mobile communications, the Internet, and software; lean production; rapid changeovers.
OE can push toward the frontier and improve multiple dimensions, but it does not by itself establish a sustainable advantage, because OE improvements diffuse rapidly and competitors imitate.
As firms chase frontier improvements (benchmarking, outsourcing, learning organizations, etc.), competition can converge toward similar practices, leading to zero-sum races and mutual destruction of profitability.
The discussion of Japan: Japanese OE leadership in the 1970s–80s produced cost and quality advantages, but many Japanese firms did not develop lasting strategic positions; to sustain advantage, firms must learn strategy, not just OE.
Example: Southwest Airlines vs. a full-service airline
- Southwest targets short-haul, low-cost, point-to-point routes in midsize cities, avoiding large airports and long-distance flights.
- It emphasizes long aircraft uptime via 15-minute gate turnarounds, a standardized 737 fleet, fast ticketing, no meals, no assigned seats, no premium classes, and high-frequency departures.
- It uses automated gate ticketing to bypass travel agents' commissions and a self-service model to reduce costs.
- This tailored set of activities yields a unique and valuable position distinct from full-service carriers.
Example: Ikea
- Ikea targets young furniture buyers who want style at low cost.
- It performs activities differently from traditional furniture stores: room-like showrooms with many product varieties, low-cost modular ready-to-assemble furniture, self-service model, in-store displays, and a warehouse area for self-pickup and delivery.
- It designs its own low-cost, modular furniture and uses a standardized, efficient fleet to maintain cost discipline.
- It offers additional services aligned with its positioning (in-store child care, extended hours, etc.).
- They emphasize a self-service model and a self-help value chain, contrasted with full-service retailers.
The Origins of Strategic Positions (three bases for positioning):
- Variety-based positioning: based on producing a subset of an industry’s products or services rather than targeting a particular customer group.
- Jiffy Lube International specializes in automotive lubricants (fast service at lower cost).
- Vanguard focuses on a range of funds with predictable performance and low expenses (e.g., index funds).
- These choices reflect producing a particular set of offerings more efficiently than rivals.
- Needs-based positioning: serving the full needs of a specific customer group.
- Ikea aims to meet all home-furnishing needs of its target customers, not just a subset.
- The private banking example contrasts two approaches:
- Bessemer Trust targets families with minimum $5 million in investable assets, offering highly personalized service (one officer per ~14 families) and a broad array of customized services; higher personnel costs but strong ROE.
- Citibank targets clients with around $250,000, offering a mass market approach with prepackaged products and less customization (account managers primarily lenders; 1:125 ratio; biannual meetings for large clients).
- Access-based positioning: segmenting customers who are accessible in different ways.
- Carmike Cinemas operates in small towns (population under 200,000) with standardized, low-cost theater complexes, lean operations, centralized purchasing, and low overhead.
- Rural vs. urban customer differences can drive changes in how marketing, order processing, logistics, and after-sale services are configured.
The three bases for positioning are not mutually exclusive and can overlap; a position can be broad or narrow (e.g., Vanguard is broad but cost-focused; Ikea is narrow and cost-focused).
The focus can be intentional (narrow target) or broad (widely targeted), with different configurations of activities required to meet similar needs.
The same value chain cannot profitably meet all three bases simultaneously; tailoring activities to variety, needs, or access is essential.
The entrepreneur’s edge and finding new positions:
- Strategic competition involves perceiving new positions that draw customers away from established positions or attract new customers.
- New entrants often have an advantage in spotting overlooked niches; positions may be non-obvious and require creativity and insight.
- Examples: Ikea identifying an overlooked market; Circuit City’s knowledge used by CarMax to refurbish used cars, offer warranties, and provide no-haggle financing.
- Entrants can prosper by occupying a position a competitor has ceded or by drawing on distinctive activities from other industries.
Practical takeaway: positioning can be broad or narrow; incumbents and entrants alike must tailor activities to create a sustainable advantage; focusing on a distinct combination of activities is essential to differentiate from rivals.
III. A Sustainable Strategic Position Requires Trade-offs
A unique position invites imitation from incumbents, who can copy the superior performer or reposition themselves to match it.
Two main imitation paths:
- Reposition to imitate the superior performer’s activities.
- Enter new positions that preserve the essence of the original advantage while avoiding direct imitation (emphasizing trade-offs).
The connection with generic strategies (from Porter’s earlier framework): cost leadership, differentiation, and focus.
- The generic strategies remain useful as broad categories of strategic positions.
- The bases for positioning (variety, needs, access) map onto these generic strategies with greater specificity.
- Examples: Vanguard represents a cost leadership approach; Ikea exemplifies cost-based focus; Neutrogena is a focused differentiator.
- A common pitfall is trying to combine incompatible strategies (e.g., being cost leader and differentiator simultaneously) which creates internal contradictions.
- Historical example: Continental Lite attempted two strategies at once and failed due to trade-off conflicts.
The essential idea: strategy requires choosing a unique position and trading off some capabilities to preserve that position against imitation.
Consequences of failing to trade off:
- Without trade-offs, firms risk becoming “all things to all customers,” eroding distinctiveness and profitability.
- Strategically, trade-offs help maintain a clear, defendable position in the marketplace.
The argument culminates in the notion that a sustainable strategy is not simply a slogan or a marketing pitch but a coherent system of activities that deliver a distinctive value proposition and are hard for rivals to imitate without sacrificing other aspects of the business.
Closing synthesis:
- Strategy is the creation of a unique and valuable position, achieved by performing different activities or performing similar activities differently.
- The essence of strategic positioning is choosing activities that are different from rivals’ activities.
- Without a distinctive position and the trade-offs that sustain it, competitive advantage erodes as competitors imitate OE improvements and converge toward similar practices.
- In practice, the strategic challenge is to balance value creation with cost discipline by selecting activities that differentiate the firm from competitors and are difficult to replicate without sacrificing other parts of the business.