What is Strategy? - Michael Porter
I. Operational Effectiveness (OE)
Definition: OE means performing similar activities better than rivals.
This includes, but is not limited to, efficiency, such as reducing defects, developing better products faster, eliminating wasted effort, employing advanced technology, or motivating employees better.
Necessity but Insufficiency: While OE is essential to superior performance and companies can reap enormous advantages from it, it is not sufficient for sustainable profitability.
Management Tools: The quest for productivity, quality, and speed has led to numerous management tools like total quality management (TQM), benchmarking, time-based competition, outsourcing, partnering, and reengineering.
The Productivity Frontier: This concept represents the sum of all existing best practices at any given time, or the maximum value a company can deliver at a given cost using the best available technology, skills, and management techniques.
When a company improves its OE, it moves toward this frontier.
The frontier is constantly shifting outward as new technologies and management approaches develop.
Why OE is not Sustainable:
Rapid Diffusion of Best Practices: Best practices are easily emulated and diffuse quickly across competitors, especially generic solutions.
Competitive Convergence: As companies benchmark and imitate one another's improvements, their strategies converge, leading to them becoming "indistinguishable from one another".
This results in "mutually destructive competition" and "wars of attrition" where no one truly wins.
Zero-Sum Competition: The pursuit of OE alone often leads to static or declining prices and pressures on costs, compromising long-term investment.
Examples:
Japanese Companies: Pioneers of OE in the 1970s and 1980s through practices like TQM and continuous improvement, achieving cost and quality advantages.
However, they rarely developed distinct strategic positions, leading to imitation and persistently low profits as the gap in OE narrowed.
U.S. Commercial-Printing Industry: Major players competing head-to-head, investing in the same equipment and practices, resulting in productivity gains captured by customers and suppliers, not retained as superior profitability.
II. Strategy
Definition: Strategy is the creation of a unique and valuable position, involving a different set of activities.
It means performing different activities from rivals' or performing similar activities in different ways. Competitive strategy is about "being different".
Essence of Strategy: The essence lies in the activities chosen and how they are performed, rather than just marketing slogans or customer descriptions.
Three Key Principles of Strategic Positioning:
Creation of a Unique and Valuable Position: Involves a different set of activities.
Sources of Strategic Positions:
Variety-based positioning: Producing a subset of an industry’s products or services. It makes sense when a company can best produce particular products using distinctive activities.
Examples: Jiffy Lube (automotive lubricants only), The Vanguard Group (array of low-cost, predictable mutual funds like index funds).
Needs-based positioning: Serving most or all the needs of a particular group of customers. This arises when customer groups have differing needs that a tailored set of activities can best serve.
Examples: Ikea (targets young furniture buyers who want style at low cost, happy to trade service for cost), Bessemer Trust Company (targets very high-wealth clients wanting capital preservation, offering highly customized services) vs. Citibank’s private bank (targets clients needing convenient access to loans, with a less customized system).
Access-based positioning: Segmenting customers who are accessible in different ways, even if their needs are similar. Access can be a function of geography, customer scale, or anything requiring a different set of activities to reach customers.
Example: Carmike Cinemas (operates exclusively in small cities and towns under 200,000 population, using a lean cost structure tailored to these markets).
Strategy Requires Trade-offs: To choose what not to do. Trade-offs occur when competitive activities are incompatible, meaning gains in one area are achieved at the expense of another.
Purpose of Trade-offs: They create the need for choice and protect against imitation by repositioners and straddlers.
Reasons for Trade-offs:
Inconsistencies in image or reputation: Delivering inconsistent value can confuse customers or undermine reputation.
Incompatibilities in activities: Different positions require different product configurations, equipment, employee behavior, skills, and management systems.
Limits on internal coordination and control: Clear choices clarify organizational priorities and prevent confusion.
Examples: Neutrogena soap (chose a "kind to the skin" medicinal positioning, saying "no" to deodorizing and large supermarket volumes, sacrificing manufacturing efficiencies for product attributes).
Continental Lite's failure (tried to straddle full-service and low-cost models, leading to compromises like cutting travel agent commissions and frequent-flier benefits, resulting in huge losses).
Strategy Involves Creating "Fit" Among a Company's Activities: Fit refers to the ways a company’s activities interact and reinforce one another. It goes beyond achieving excellence in individual activities to combining them effectively.
Importance of Fit: Drives both competitive advantage and sustainability. It locks out imitators by creating an interlocking system that is hard to replicate, as rivals get little benefit from imitating only parts.
Types of Fit:
First-order fit: Simple consistency between each activity and the overall strategy.
Example: Vanguard aligns all activities with its low-cost strategy (minimal portfolio turnover, direct distribution, limited advertising, employee bonuses tied to cost savings).
Second-order fit: Activities are reinforcing. One activity enhances the value of another.
Example: Neutrogena's medical and hotel marketing activities reinforce each other, lowering total marketing costs.
Third-order fit: Optimization of effort, where coordination and information exchange across activities eliminate redundancy and minimize wasted effort.
Example: The Gap optimizes inventory management by restocking basic clothing almost daily from warehouses, minimizing the need for large in-store inventories and speeding up product cycles.
Activity-System Maps: Useful tools to visualize how a company's strategic position is embedded in a tailored set of activities, showing how higher-order strategic themes are implemented through clusters of linked activities.
Example: Southwest Airlines (low-cost, short-haul, point-to-point service between midsize cities and secondary airports).
Its strategy is a "whole system of activities" where elements like rapid gate turnarounds, no meals/assigned seats/baggage transfers, standardized 737 fleet, and motivated ground crews all reinforce each other to deliver low cost and high convenience.
III. Challenges to Strategy and the Role of Leadership
Why Companies Fail to Have Strategy:
Misguided view of competition: Confusing OE with strategy, believing trade-offs are unnecessary, and imitating competitors.
Organizational failures: Reluctance to make difficult choices, herd behavior, and employees lacking a holistic vision due to empowerment without strategic context.
The Growth Trap: The desire to grow often leads managers to broaden their position by adding product lines, features, or acquiring brands, which blurs uniqueness and compromises the strategic position.
Examples: Maytag expanded beyond reliable washers/dryers into full-line appliances and acquired other brands, leading to a decline in return on sales.
Neutrogena broadened distribution and product lines, diluting its image and uniqueness.
Profitable Growth: Instead of broadening, companies should concentrate on deepening a strategic position, leveraging existing activity systems and reinforcing uniqueness.
This can involve globalization consistent with strategy or creating stand-alone units for different strategic positions.
The Role of Leadership: Crucial for developing and maintaining a clear strategy. Leaders must:
Define and communicate the company's unique position.
Make trade-offs and forge fit among activities.
Provide discipline and say "no" to distractions or compromises that blur the strategy.
Ensure strategic continuity, allowing for improvements in individual activities and fit, rather than frequent, costly shifts in positioning.