chapter
1
What is strategy ?
Michael E. Porter
1.01 Introduction
• The quest for productivity, quality & speed has
spawned remarkable number of management tools &
techniques, like;–
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Total quality management benchmarking
Outsourcing
Partnering
Reengineering
Change management
• Many companies had been frustrated by their inability
to translate these gains into sustainable profitability
• Bit by bit management tools that lead to operational
effectiveness have taken the place of strategy .
Operational effectiveness & strategy work in very
different ways.
1.02 Operational effectiveness
Operational effectiveness (OE) means performing
Similar activities BETTER than rivals perform them
It includes efficiency but not limited to it .
 It refers to any number of practices that allow a
company to better utilize its inputs
– Ex: reducing defect product or developing better products
– The Japanese challenge to Western companies in the
1990s.
Strategic positioning means performing
different activities from rivals or performing
similar activities in different ways ( the wide
definition)
Operational effectiveness

Constant improvement in operational effectiveness
is necessary to achieve superior profitability, but is
usually not sufficient and could not be sustained.
Few have competed successfully. Why ? Because :-
I.
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Staying ahead of rivals gets harder every day
Competitors can imitate management , operational
techniques , effectiveness , new technology, input
improvement, and superior ways of meeting customers .
Benchmarking and outsourcing are being done by many
firms, which results in competitive convergence.
Competition produces absolute improvement in OE , but
at the end it leads to relative improvement for no one.
–
•
ex. Japanese companies / Korean and now Chinese.
Operational effectiveness
II.
•
•

Competitive convergence
Is more subtle (refine , delicate).
The more benchmarking companies do, the
more they look alike
This convergence lead to industry
consolidation through mergers which was
driven by performance pressures but many
were lacking strategic vision .
1.03 Strategy rest on unique activities
• Operational effectiveness and strategy are both essential to superior
performance. Strategy is hard to imitate, and therefore it could be
sustainable if certain conditions are met .
• A competitive strategy is about being different from rivals
- EX :Southwest Airlines offers a good example of competitive
strategy, where different set of activities are used to deliver a unique
mix of value to customers. Southwest has low costs and offers low
prices to customers.
• The essence of strategy is in the unique activities contained
– Choosing to perform activities differently or to perform different
activities than rivals should be carefully chosen to offer a
sustainable advantage.
- EX : IKEA is a global furniture retailer that targets young buyers
who want style at low cost. Customers use self-service methods
and do their pickup and delivery.
The origin of strategic positions
• Strategic positions originate from three distinct
sources, which are not mutually exclusive &
often overlap
1. Variety based positioning origin
–
It is based on choice of product or service varieties
rather than customer segments . In variety-based
positioning, only a subset of customers’ needs are
met.
– EX: “Jiffy Lube” specializes in automotive
lubricants and does not offer other car
maintenance services.
The origin of strategic positions
2. Needs based positioning origin
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Serving most or all the needs of a particular group of
customers
Targeting a segment of customers.
There are groups of customers with different needs
Arises when a tailored set of activities can serve those needs
best
Ex A bank might target only people with net worth above $5
million, and offers services that suit their specific needs..
3. Access based positioning origin
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Access can be a function of customer geography or customer
scale, or anything that requires a different set of activities that
reach customer in best way
EX: Rural vs. Urban based customer
Ex. Carmike cinema serving customers who are in towns with
populations under 200,000.
The origin of strategic positions
• Whatever the basis, positioning requires a
tailored set of activities because it is always a
function of
– Differences on the supply side i.e. Differences in
activities is not always a function of differences in
the demand, customer side.
Strategy is the creation of unique & valuable
position involving a different set of activities .
The essence of strategic positioning is to choose
activities that are different from rivals.
1.04 Trade-offs
• Choosing a unique position is not enough to
guarantee a sustainable advantage . A valuable
position could attract imitation by two ways:1. Competitor can reposition himself to match the
superior performer
2. Undergoing Straddling : means seeking to match
benefits of a new successful position while
maintaining its existing position . This can be
done thru grafting (planting) new features ,
services, or technologies onto the activities the
company already perform.
Trade-offs
• A strategic position is not sustainable unless there are
trade-offs with other positions.
• A trade-off means that more of one thing necessitates less
than other .Trade-offs occur when activities are
incompatible.
• Trade-offs protect against repositioners and straddlers .
Positioning trade-offs are pervasive in competition &
essential to strategy . They create the need for choice &
purposefully limit what a company offers
EX: Neutrogena made trade-offs when it sold its premium medical
soap in drugstores and not in super stores & did not offer price
promotions.
Trade-offs
•
1.
Trade-offs arise for 3 reasons
Inconsistencies in image or reputation: creating new image is
costly and is a barrier to imitation. If a company wants to be all
things to all people, it creates confusion and will appear as
expert in nothing.
2 . From activities themselves ( in-compatible)
– Different positions ( with their tailored activities) require
different product configurations, different equipment,
different employee behavior, different skills & different
management systems
– In general , value is destroyed if activity is over designed or
under designed for its use.
3. Trade-offs could arise from limits on internal coordination and
control .Thus senior management should make priorities clear.
Trade-offs
• In general false trade-offs ( for ex. between cost
& quality ) occur primarily when there is
redundant or wasted effort, poor control or
accuracy or weak coordination .Simultaneous
improvement of cost & differentiation is possible
only when a company begins far behind the
productivity frontier or when the frontier shifts
outward
– EX: Toyota & Honda motor company .
 The essence of strategy is choosing what not to
do and what to do. With no trade-offs ,there
would be no need for strategy.
1.05 Fit drives competitive advantage &
sustainability
• Operational effectiveness is about achieving excellence of
individual activities.
• Positioning choices determine also how activities relate to
one another . Strategy is about combining activities (
synergy) . Competitive advantage comes from the way
positioning activities fit & reinforce one another.
• A Fit locks out imitators by creating a chain that is as
strong as its strongest link. Strategic fit creates
competitive advantage and superior profitability and helps
in keeping sustainability.
• The most valuable fit is when it is strategy-specific
because it improves the uniqueness of the company’s
position and amplifies trade-offs which makes it hard for
competitors to imitate.
•
Managers have mistakenly turned to “core”
competencies, critical resources, & key success
factors rather than seeing the company as a
whole.
• Fit is important because discrete activities often
affect one another Ex. :– Sophisticated sales forces with premium
technology & its marketing approach
– Production line combined with an inventory &
order processing system that minimize the
need for stocking finished goods
I .Three types of fit are known :
1. First-order fit: simple consistency between each activity and the
overall strategy ( ex. low-cost strategy).
2.
Second-order fit: when activities are reinforcing ( ex. Bic
combines point-of-sale activity, heavy TV advertising and
packaging innovations to increase impulse buying).
3.
Third-order fit: optimization of effort, where there is a
coordination and information exchange across activities ( ex.
with suppliers & distributors) to minimize wasted effort.
- Ex. Holding store inventory or restocking from warehouse.
( Zara ).
In the above three Fit-types, the whole matters more than any
individual part . The competitive advantage grows out of the
entire system of activities. The fit among activities reduces
costs or increases differentiation
•
II. Fit and sustainability
•
•
•
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Strategic fit that insures a competitive advantage and
the sustainability of that advantage among many
activities is fundamental .
The more a company’s positioning rests on activity
systems with 2nd & 3rd order fit, the more sustainable
its advantage will be . Such system by nature is hard
to imitate
Fit among a company’s activities create pressures &
incentives to improve operational effectiveness which
makes imitation even harder .
Fit means that poor performance in one activity will
degrade the performance in others, so that weaknesses
are exposed & more prone to get attention
• Positions built on systems of activities are much more
sustainable than those built on individual activities.
• When activities complement one another, rivals will get
little benefit from imitation unless they successfully match
the whole system.
• One implication is that strategic positions should have a
horizon of a decade or more, not a single planning cycle
• Achieving fit is difficult because it requires the integration
of decisions and actions across many independent subunits.
• Activities complement each other to form a whole system
where there is fit among the activities. Southwest Airlines
succeeded in its ‘low cost - low price’ strategy because of its
whole system.
• For the above reasons, finding a new strategic position is
better than being second or third imitator of an occupied
position.
Summary - What is strategy ??!
• The success of a strategy depends on doing things
well and integrating among them .
• If there is no fit among activities, there is no
distinctive strategy and little sustainability.
• Strategic positioning sets the trade-off rules that
define how activities will be integrated. For
sustainability, organizational structure, systems, and
processes need to be strategy-specific.
• A company should build unique capabilities and skills
tailored to its strategy. (see table 1.1 page 25)
Ex. Southwest Airlines is a very good example because
the company integrated many activities that
complemented each other and made the company as a
leader in low cost and low price.
1.06 Rediscovering strategy
I.
The failure to choose
•
The great threat to strategy often comes from within.
•
A strategy is undermined by
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A misguided view of competition from managers.
Organizational failures
The desire to grow
Managers under increasing pressure are
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Caught up in the race of operational competitiveness.
Mistakenly focusing on customer .
Often lack a vision of the whole & the perspective to
recognize trade-offs.
II. The growth trap
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The desire to grow has perhaps the most perverse effect on
strategy.
Broadly targeted strategies emphasizing for example low
pricing result in
– lost sales with customers sensitive to feature services
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Differentiators loose sales to price sensitive customer.
Pressure to grow lead managers to
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broaden the position by extending product lines
– adding new features.
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imitating competitor’s popular service
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matching processes
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making acquisitions
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making diversification.
Compromises and inconsistencies in the pursuit of growth will
erode the competitive advantage.
III Profitable growth
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i.
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ii.
Growth imperative is hazardous to strategy . The
prescription is to concentrate on deepening a strategic
position rather than broadening & compromising it
Deepening a position involves
Making the company’s activities more distinctive
Strengthening fit
Communicating the strategy better to customers
who would value it
Leveraging the existing activity system by offering
features or services that rivals cannot imitate.
Companies seeking growth through broadening within
their industry can best contain the risks to strategy by
creating stand alone units, each with its own brand
name & tailored activities
IV. The role of leadership
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The challenge of developing or re-establishing a clear
strategy is often primarily an organizational one & depends
on a strong leader willing to make choices ( classical school)
General management core strategy is:
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Defining & communicating the company’s unique position
, making trade-offs and forging fit among activities
•
The Leader must :
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Provide discipline to decide which industry changes &
customer’s need the company will respond to.
Maintain the company’s distinctiveness
Secure no distractions to the company, no compromise (
that evolutionary theory stressed ) and no imitating of
competitors.
One of the leader’s job is to teach others about strategy
and to stay on.
Mangers must clearly distinguish operational
effectiveness from strategy
The operational agenda is the proper place for
constant change where flexibility efforts are
essential to achieve best practice.
Strategic agenda is the right place for defining a
unique position, making clear trade-off and
tightening fit . The strategic agenda demands
discipline & continuity. Its enemy is distraction &
compromise.
• Strategy renders choices about what not to do as
important as choices about what to do. Leaders
should also set limits and decide which group of
customers to target.
• Convergence should be avoided because it makes
companies in the industry look alike.
• Improving operational effectiveness is a necessary
part of management, but it is not a strategy.
Operational effectiveness involves continual
improvement everywhere there are no trade-offs,
and is appropriate for flexibility and best practice.
• Strategy is sustainable and cannot be imitated.
• Operational effectiveness is important but can be
copied.
• The published articles we use in B300 constitute
operational effectiveness for the University.
• The development of a high-quality distance
learning program by using unique methods, is a
strategy.
• In a sustainable strategy: it is the synergy
between activities that produces value. Strategy
is about being different and doing existing things
better.( to Marian Mazuccato)
WHAT MARIANA MAZZUCATO SAYS ABOUT STRATEGY
Extracts from the B300 audio cassette
“Strategy is how firms differentiate from each
other”
“Strategy is how managers create synergy
between resources (tangible and intangible in
an organisation)
“Strategy is about creating
sustainable competitive
advantage”
“Strategy is both thinking about new products and markets and doing things
differently than you were doing before (especially different from others) and
also about doing things better (innovating existing products, better targeting of
existing customers; etc)”
“Strategy is thinking about how different parts
of the organisation interact and how the
organisation adapts to change”
“Strategy is about being able to decide when to change from
focusing on exploration to focussing on exploitation – it is not
just about one or the other”
“More than ever, strategy is about organisational change”