What is Strategy?

Michael Porter
HBR - November/December
1996

The Basics
Strategy: the creation of a unique and
valuable position involving a unique set
of activities; being different
Activities: the basic units of
competitive advantage
Competitive Advantage: grows out of the
entire system of activities; capacity to
outperform rivals by establishing a
difference it can preserve over time

The Basics - 2
Differentiation: created by the choice
of activities and how well performed
Strategic Positioning: means
performing different activities from
rivals or performing similar
activities in different ways
Operational Effectiveness (OE): means
performing similar activities better
than rivals

Superior Profitability
Delivering greater value allows a
company to charge higher average unit
prices; greater efficiency results in
lower average unit costs.
Differences in operational
effectiveness (OE) are importance
differentiators in profitability among
rivals as OE directly affects relative
cost positions and levels of
differentiation.

Productivity Frontier
Sum of all best practices at a given time
The maximum value that a firm can provide
at a given cost using best practices
As OE improves within a firm, it moves
closer to the productivity frontier.
OE is necessary for superior profitability
but not solely sufficient. Rapid
diffusion of best practices reduces longterm impact of OE on profitability.

Productivity Frontier - 2
OE competition shifts the productivity
frontier outward, effectively raising
the bar for everyone. But although such
competition produces absolute
improvement in operational
effectiveness, it leads to relative
improvement for no one.
The more benchmarking companies do, the
more they look alike!

OE Does Not Necessarily

Equal Strategy
Management tools (i.e.
benchmarking, best practices,
outsourcing) have taken the place
of strategy.
Operational effectiveness (OE) productivity, speed, quality - and
strategy are both necessary for
superior performance

Operational Effectiveness
Is Not Strategy
Concentration on core competencies
and competitive positioning via
benchmarking can lead companies down
the path toward mutually destructive
competition.
Companies must distinguish between
operational effectiveness and
strategy and not confuse them.
What is Strategy, Michael Porter, Harvard Business Review, November 1996, Reprint # 96608

Operational Effectiveness
Is Not Strategy
Operational effectiveness is necessary to
compete but not sufficient to win.
A company can outperform others and win only if
it can establish a difference that it can
sustain a differential competitive advantage.
In the past barriers to entry were the primary
competitive advantage.
Now, it's better products and service.

Operational effectiveness means doing things

better than competitors, strategic positioning
means doing things different from competitors
and having better products and service.

OE Programs
TQM
Time-based
Competition
Benchmarking
Learning
Organization
Outsourcing
Empowerment

Continuous
Improvement
Virtual
Organization
Forms
Best Practices
SQC
Change
Management

Competitive Strategy
Being different in the marketplace from
rivals
Deliberately choosing a different set of
activities to deliver a unique mix of
value

The essence of strategy is in choosing to

perform activities differently, or to
perform different activities (or both),
than rivals.

Strategic Positions
Variety-based (Do what you do best):
produces a subset of industry
products/services; based on the choice
of product/service varieties rather
than customer segments; viable when a
firm can best produce particular
products/services using a distinct set
of activities. Serves a wide array of
customers but only a subset of their
needs.

Example
At Staples for example,
you can find everything
you could ever need in the
office. It doesnt matter
if you are a freelancer, a
secretary or the boss of a
company. Staples is about
office equipment, not
about household articles
and not about car parts.

Strategic Positions - 2
Needs-based (Do everything, but only
for a particular group of customers):
serves most or all of the needs of a
particular group of customers with a
tailored set of activities;
differences in needs will not
translate into meaningful positions
unless the best set of activities to
satisfy them also differs.

Example
IKEA is still the perfect example
for such a positioning. The
furnishing company serves all
needs, not just a few, of its
target group of customers which are
primarily young furniture buyers
who want style at low cost. Of
course not only young people are
buying there. But it is essential
to have a core customer segment in
mind when designing products and
services.

Strategic Positions - 3
Access-based (Go where your customers are):
segmenting customers who are accessible in
different ways; access can be a function of
customer scale or geography - anything that
requires a different set of activities to
reach customers in the best way.
All positioning is a function of
differences on the supply (activity) side
but not necessarily on the demand
(customer) side.

Example

Carmike Cinemas operates

movie theaters exclusively in

cities and towns with
populations under 200,000. By
being the dominant if not the
only theater in its marketsthe
main competition is often the
high school football team
Carmike is also able to get its
pick of films and negotiate
better terms with distributors.

Strategic Positions - Summary

Sustainability of position requires trade-offs
Trade-offs occur when activities are incompatible;
more of one thing requires less of another.
An airline can choose to serve meals adding cost and
slowing turnaround time at the gateor it can choose not to,
but it cannot do both without bearing major inefficiencies.

Trade-offs arise for 3 reasons:

inconsistencies in image or reputation
different positions require different activity sets
Internal focus requires priority setting - cant be all
things to all customers successfully

Sustainable Competitive
Advantage
Unique position does not guarantee a
sustainable competitive advantage
Valuable position attracts imitators
based on:
matching superior performance factors.
straddling: match the benefits of a
successful position while maintaining
existing position; graft new features,
services, or technologies onto current
activity set.

Sustainable Competitive
Advantage - 2
Positioning trade-offs are essential
in effective strategy:
creates need to choose and purposefully
limit what a company offers
deters straddling or repositioning of
rivals as competitors that engage in these
activities undermine current strategies,
degrade value of existing activities, and
spread resources too thin (trying to be
all things to all customers)

Sustainable Competitive
Advantage - 3
The essence of strategy is choosing
what not to do.
Without trade-offs, a sustainable
competitive advantage cannot be
achieved.
Strategy is about combining
activities whereas OE is about
excellence in individual activities or
functions.

Strategy & Systems

Thinking
Strategy involves a whole system of
activities, not a collection of parts.
Competitive advantage comes from the
way activities fit and reinforce one
another (think horizontal & process
management here!).
Strategic fit among activity sets locks
out rivals; synergy creates competitive
advantage & superior profitability.

Strategic Fit
Fit = seeing the company as a system
not just a collection of core
competencies, critical resources, and
key success factors.
3 types of strategic fit (the whole
matters more than any individual part):
simple consistency between each activity
(function) and the overall strategy
activities are reinforcing
optimization of effort

Fit & Sustainability

As fit becomes more complex (multiple
interrelationships) within a firm, the more
difficult imitation is.
Its important to remember that all the
activities in the chain are linked and
interdependent. Positioning choices determine
not only what to do and how to do it, but
also how everything fits together.
While operational effectiveness is about
achieving excellence in each activity,
strategy is about combining activities.

Role of Leadership
Focus on creating distinctiveness
Make tough decisions on tradeoffs
Define the companys position
Manage the entire system to
create fit
Focus on the long term
Stewardship of corporate strategy