What is Strategy?

Strategy v. operational effectiveness Whats been happening to Toyota

The last 10 years?

The past year?

Strategy v. operational effectiveness

Operational effectiveness means performing the value-creating activities better than rivals.

Companies can reap enormous advantages from operational effectiveness, as Japanese firms demonstrated with such practices as total quality management and continuous improvement.

Operational Effectiveness (OE) is not Strategy

OE and Strategy are both essential to obtain superior performance, but a company can outperform rivals only if it can establish a difference that it can preserve. Managers have been preoccupied with improving operational effectiveness through programs such as:
TQM Time based competition Benchmarking Results in the short run: costs + prices

profitability

Strategy v. operational effectiveness

The problem with operational effectiveness?

Best practices are easily emulated. As all competitors in an industry adopt them, the productivity frontier shifts outward.

Knowledge is usually resident in the third-party implementer

Rents are captured by the implementer, so the surplus available to the firm is limited This also enables rapid diffusion of new practices, as well as transmission of sector-specific solutions to competitors

OE is necessary but not sufficient: Weaknesses

Gradually, managers have let OE supplant strategy. The results are:

Zero-sum competition Static or declining prices Pressures on cost that compromise companys ability to invest in the business for the long-term

Strategic positioning
Strategic positioning: achieve sustainable competitive advantage by reserving what is distinctive about a company.
It means performing different activities from rivals, or performing similar activities in different ways.

The Origins of Strategic Positions

Companies can obtain strategic position in three ways (not mutually exclusive):
1. Variety-based positioning 2. Needs-based positioning 3. Access-based positioning

1.

Variety-Based Positioning

Based on the choice of product or service varieties rather than customer segments.

This position can serve a wide array of customers but it will primarily will meet only a subset of their needs. E.g.: The Vanguard Group

2.

Needs- Based Positioning

Based on targeting a segment of customers.

This position is not that obvious if companies consider the difference in needs and the range of activities that should differ between the segments. E.g.: Citibank Private bank v. Bessemer

3.

Access- Based Positioning

Based on the importance of accessing the product/service.

Access can be a function of customer geography or anything that requires a different set of activities to reach customers in the best way E.g.: Carmike Cinemas

Three key principles underlie strategic positioning

1. Strategy is the creation of a unique and valuable position, involving a different set of activities.

IKEAS Strategic Positioning

The leading furniture company in the world What is the market?

Young, stylish but costconscious customer base

IKEAS Strategic Positioning

Conventional business model
Product variety on offer Third party manufacture Heavy customer service High customization Long lead time and high cost IKEA business model Self-service Room-like settings Own pickup and delivery Extra services Extended hours In-store child care???

IKEA Activity Map

Trade-offs
2. Strategy requires you to make trade-offs in competingto choose what not to do.

Some competitive activities are incompatible; thus, gains in one area can be achieved only at the expense of another area.
Neutrogena soap is positioned more as a medicinal product than as a cleansing agent. The company says no to sales based on deodorizing, gives up large volume, and sacrifices manufacturing efficiencies.

Trade-offs

Why trade-offs?
A valuable position can be imitated

How do they arise?

Image inconsistencies/cost of image makeover Inflexible activities IKEA: self-service v. customer service Organizational coordination costs

Thus
Choose what not to do

Fit
3. Strategy involves creating fit among a companys activities.

Vanguard Group aligns all of its activities with a lowcost strategy; it distributes funds directly to consumers and minimizes portfolio turnover.

Fit has to do with the ways a companys activities interact and reinforce one another.

Fit
Fit drives both competitive advantage and sustainability: when activities mutually reinforce each other, competitors cant easily imitate them.

Continental Lite and Southwest Airlines activities The simple math of compounded probability

Types of fit

First-order
Simple consistency Vanguard Minimal portfolio churn Thus, lower need for star money managers Disintermediation Publicity v. advertising (Starbucks model) Compensation linked to cost savings Consistent cost leadership strategy

Types of fit
Second-order
Mutual reinforcement Neutrogena Privilege of stocking in upscale hotels under own name Direct marketing to upscale clients New clients may then order from drugstores

Types of fit

Third-order
Effort optimization Gap Product availability key Gap restocks v. in-store inventory How does this help? Store locations are pricier Why is it easier for them to do it? Product designs are fewer

Strategic Position (SP): Fit and Sustainability

Strategic fit among many activities is essential to the sustainability of the competitive advantage. Positions built on systems of activities are more sustainable than those built in individual activities (OE).

When activities complement one another, rivals will get little benefit from imitation ( e.g.: Continental Airlines) unless they successfully match the whole system.

Strategic Position (SP): Fit and Sustainability

SP sets the trade-off rules that defines how individual activities will be integrated. SP should have a long-term horizon of a decade or more, not a single planning cycle. The success of strategy is doing many things well and integrating them.

Why many companies do not have a strategy?

Leaders have the idea that making trade-offs is a sign of weakness and do not understand the need of it. Pursuing OE is easier to attain because is concrete and actionable. Companies imitate one another assuming that rivals have something they do not. Trade-offs and limits appear to constrain growth. However, compromise and inconsistencies in the pursue of growth may erode a competitive advantage.

What should companies and leaders do ?

They should reevaluate their strategies and challenge themselves to start over. They should refocus on the unique core and realign the companies activities with it. Evaluate the vision of the founder and reexamine the original strategy. Leaders should be in charge of defining and communicating the companys unique position, making trade-offs and forging it among activities.

Why is the study of strategy important to you as future leaders?

Employees need guidance

How to deepen a strategic position. How to extend the companys uniqueness while strengthening the fit among its activities. Deciding which target group of customers and needs to serve requires discipline, the ability to set limits, and forthright communication. Strategic tradeoffs- operations normally do not require them

Strategy and leadership are inextricably linked