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;– – – – – 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. – – 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 – – – – – 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 – – – 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 • • • • 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 – – – • A misguided view of competition from managers. Organizational failures The desire to grow Managers under increasing pressure are – – – 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 • • • 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 – Differentiators loose sales to price sensitive customer. Pressure to grow lead managers to – broaden the position by extending product lines – adding new features. – imitating competitor’s popular service – matching processes – making acquisitions – making diversification. Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage. III Profitable growth • i. – – – – 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 • • 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: – Defining & communicating the company’s unique position , making trade-offs and forging fit among activities • The Leader must : – – – – 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”
© Copyright 2024 Paperzz