What Is Strategy?

Michael Porter
What Is Strategy? Definition - it is the quest to gain and sustain competitive advantage It is about - Being different from your rivals - Creating value while containing cost - Deciding what to do and what not to do - Combining a set of activities to stake out a unique position - Requiring long-term commitment that are often not easily reversible Strategic Management

Three key questions 1. Where are we now? 2. Where do we want to be? 3. How do we get there? Why?

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Porter's Definitions

Why have a strategy? - Having a 'fit' between the external environment and internal strategy, processes and structure generally has positive performance outcomes - Firms with a strategic management focus tend to outperform those that dont

Initiation of Strategy - Triggering Events 1. New CEO - Resignation, ousted, retired, death - External intervention - financial backing falls through 2. Change (or threat of change) in ownership - takeover, merger 3. Performance issues - below expectations 4. Strategic Inflection Points - New technologies Computing industry - New regulations Pharmaceutical industry - Change in customer preference Automotive industry

Operational Effectiveness (OE) performing similar activities better than your competitors. Ex: tools used to increase value add or efficiency are: TQM, benchmarking, outsourcing, partnering, reengineering, change management)

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Strategic Positioning Performing different activities than your competitors or preforming similar activities in differently Superior Profitability Providing higher value add and charging for it, achieving greater efficiency and lower costs, doing both. Ongoing improvement in OE contributes to superior profitability Productivity Frontier Sum of best practices at a given time Porter's Definitions of Strategy 1. Essentially, developing a competitive strategy is developing a broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals. 2. Strategy is seen as a way of integrating the activities of the diverse functional departments within a firm including marketing, production, research and development, procurement, finance and the like. 3. Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.

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Porter's Generic Strategies - COST Generic Strategy Cost Leadership Capital investment Process engineering Labor Supervision Ease in Manufacturing Low-Cost distribution Generic Strategy Skills & Resources Differentiation Porter's Generic Strategies - FOCUS

Porter's Generic Strategies - DIFFERENTIATION Org. Requirements Strong coordination among functions Incentives based on subjective measurements Ability to attract highly skilled or creative people

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Skills & Resources Org. Requirements Strong Marketing & creativity Product engineering Quality or technology leadership (reputation) Tradition or unique combination of skills
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Stringent Cost Controls Detailed Reporting Structured Organization & defined responsibilities Quantitative targets & incentives

Generic Strategy Skills & Resources Focus

Org. Requirements

Tailored to the specific target Tailored to the specific target

Strategic Positioning and Tradeoffs Achieving operational effectiveness is not enough...why? - Best practices are adopted quickly by competitors - Leads to competitive convergence Being unique is not enough...why? - Competitors can reposition - Competitors can straddle a. Add new features b. Keep existing (good) features

Trade-offs require an increase in one area to be offset by a decrease in another Trade-offs make a strategic position sustainable why? - Forces you to make a choice - Guards against repositions and straddlers Fit, Fit, Fit !!!

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Growth and Strategy

Coordination activities and functions around the strategy - Dell - SW Air Types of Fit First Order Fit Consistency between each activity and the overall strategy i.e. -- Vanguard Second Order Fit Reinforcing i.e. -- Neutrogena's medical and hotel marketing activities reinforce each other Third Order Fit Optimizing i.e. -- Gap's rapid restocking strategy 'The whole is great than the sum of its parts'

Generally, the more company's positioning rests on activity systems with second and third order fit, the more sustainable its advantages (achieving fit is difficult in integrating decisions and actions across many independent subunits)

Deepening a strategic position involves: - Designing the company's activities more distinctive - Strengthening fit

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- Communication strategy with customers - Better penetration needs a varieties that is distinctive Getting Back On Track What are our distinctive capabilities? - Core capabilities - things you do well - Distinctive competencies - things you do better than everyone else Which of our products / service is most profitable/ The 80/20 rule For many phenomena 80% of consequences stem from 20% of the causes i.e. -- 20% of consumers buy 80% of a product, 20% of retailers sell 80% Which of our customers is most satisfied? Which customers are most profitable? What stands out in our value chain?

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