What Is Strategy? Michael E Porter Harvard Business Review November 1996

Summary past Aarti Nirgudka
Master of Accountancy Program,
Academy of Southward Florida, Summer 2002

I. Operational Effectiveness Is Not Strategy

Co-ordinate to Porter, various management tools like total quality management, benchmarking, time-based competition, outsourcing, partnering, reengineering, that are used today, do heighten and dramatically better the operational effectiveness of a company but fail to provide the company with sustainable profitability. Thus, the root cause of the problem seems to be failure of management to distinguish between operational effectiveness and strategy: Management tools take taken the place of strategy.

Operational Effectiveness: Necessary but Not Sufficient

Although both operational effectiveness and strategy are necessary for the superior performance of an organization, they operate in different ways.

Operational Effectiveness: Performing similar activities ameliorate than rivals perform them. Operational effectiveness includes but is not limited to efficiency. It refers to many practices that allow a company to meliorate utilize its inputs.

Strategy: Performing dissimilar activities from rivals' or performing similar activities in different ways.

Porter states that a company tin can outperform rivals only if it tin can establish a difference information technology can preserve. Information technology must deliver greater value to customers or create comparable value at a lower cost, or do both. Nonetheless, Porter argues that most companies today compete on the basis of operational effectiveness. This concept of competition based on operational effectiveness is illustrated via the productivity borderland, depicted in the figure below.

The productivity frontier is the sum of all existing best practices at any given time or the maximum value that a company can create at a given cost, using the best available technologies, skills, direction techniques, and purchased inputs. Thus, when a company improves its operational effectiveness, it moves toward the frontier. The frontier is constantly shifting outward as new technologies and management approaches are developed and every bit new inputs become available. To keep upwards with the continuous shifts in the productivity frontier, managers have adopted techniques like continuous improvement, empowerment, learning organization, etc. Although companies amend on multiple dimensions of performance at the same time as they motility toward the frontier, most of them neglect to compete successfully on the basis of operational effectiveness over an extended flow. The reason for this beingness that competitors are quickly able to imitate all-time practices like management techniques, new technologies, input improvements, etc. Thus, competition based on operational effectiveness shifts the frontier outward and finer raises the bar for everyone. Simply such contest only produces absolute improvement in operational effectiveness and no relative improvement for anyone.

"Competition based on operational effectiveness solitary is mutually destructive, leading to wars of attrition that can exist arrested just limiting competition"(p. 64). Such competition can exist witnessed in Japanese companies, which started the global revolution in operational effectiveness in the 1970s and 1980s. However, now companies (including the Japanese) competing solely on operational effectiveness are facing diminishing returns, nix-sum competition, static or declining prices, and pressures on costs that compromise companies' ability to invest in the business for the long term.

II. Strategy Rests on Unique Activities

"Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value" (p. 64). Moreover, the essence of strategy, according to Porter, is choosing to perform activities differently than rivals. Strategy is the creation of a unique and valuable position, involving a different set of activities.

The Origins of Strategic Positions

Strategic positions emerge from three sources, which are not mutually sectional and often overlap.

1. Variety-based positioning: Produce a subset of an industry's products or services. Information technology is based on the choice of production or service varieties rather than customer segments. Thus, for virtually customers, this type of positioning will only encounter a subset of their needs. It is economically feasibly only when a company tin can best produce detail products or services using distinctive sets of activities.

two. Needs-based positioning: Serves nigh or all the needs of a particular group of customers. It is based on targeting a segment of customers. It arises when there are a group of customers with differing needs, and when a tailored ready of activities can serve those needs all-time.

3. Access-based positioning: Segmenting customers who are accessible in unlike means. Although their needs are like to those of other customers, the best configuration of activities to attain them is different. Access can be a part of customer geography or customer scale or of anything that requires a dissimilar gear up of activities to reach customers in the best manner.

Any the basis (variety, needs, access, or some combination of the three), positioning requires a tailored set of activities because it is ever a role of differences in activities (or differences on the supply side). Positioning, moreover, is not always a role of divergence on the demand (or customer) side. For example, diverseness and admission positionings do not rely on any customer differences.

Iii. A Sustainable Strategic Position Requires Trade-offs

According to Porter, a sustainable advantage cannot be guaranteed past merely choosing a unique position, every bit competitors will imitate a valuable position in one of the two following ways:

i. A competitor can cull to reposition itself to lucifer the superior performer.

2. A competitor can seek to lucifer the benefits of a successful position while maintaining its existing position (known as straddling).

Thus, in gild for a strategic position to be sustainable in that location must be trade-offs with other positions. "A trade-off ways that more of i thing necessitates less of another" (p. 68).

Merchandise-offs occur when activities are incompatible and arise for iii reasons:

1. A company known for delivering one kind of value may lack brownie and misfile customers or undermine its own reputation by delivering another kind of value or attempting to deliver two inconsistent things at the same fourth dimension.

two. Merchandise-offs ascend from activities themselves. Dissimilar positions crave different production configurations, dissimilar equipment, different employee behavior, dissimilar skills, and unlike management systems. In general, value is destroyed if an action is over designed or under designed.

3. Trade-offs arise from limits on internal coordination and control. By choosing to compete in one way and not the other, direction is making its organizational priorities clear. In contrast, companies that try to be all things to all customers, often risk confusion amongst its employees, who and so attempt to brand day-to-twenty-four hours operating decisions without a clear framework.

Moreover, trade-offs create the demand for choice and protect against repositioners and straddlers. Thus, strategy can also be defined as making merchandise-offs in competing. The essence of strategy is choosing what not to do.

Four. Fit Drives Both Competitive Advantage and Sustainability

Positioning choices determine non only which activities a company will perform and how information technology will configure individual activities but besides how activities relate to 1 another. While operational effectiveness focuses on individual activities, strategy concentrates on combining activities.

"Fit locks out imitators by creating a concatenation that is every bit stiff as its strongest link" (p. 70). Fit, as per Porter, is the central component of competitive advantage because detached activities oft impact one another.

Although fit among activities is generic and applies to many companies, the most valuable fit is strategy-specific because information technology enhances a position's uniqueness and amplifies trade-offs. There are three types of fit, which are not mutually exclusive:

1. First-order fit: Unproblematic consistency betwixt each activity (office) and the overall strategy. Consistency ensures that the competitive advantages of activities cumulate and exercise not erode or cancel themselves out. Further, consistency makes it easier to communicate the strategy to customers, employees, and shareholders, and improves implementation through single-mindedness in the corporation.

2. Second-lodge fit: Occurs when activities are reinforcing.

3. Third-guild fit: Goes beyond activity reinforcement to what Porter refers to every bit optimization of effort. Coordination and data exchange beyond activities to eliminate redundancy and minimize wasted effort are the most basic types of effort optimization.

In all three types of fit, the whole matters more whatsoever individual part. Competitive advantage stems from the activities of the entire system. The fit among activities substantially reduces toll or increases differentiation. Moreover, according to Porter, companies should recollect in terms of themes that pervade many activities (i.eastward., low cost) instead of specifying private strengths, cadre competencies or disquisitional resource, as strengths cut across many functions, and one strength blends into others.

Fit and Sustainability

Strategic fit is primal non only to competitive advantage but also to the sustainability of that reward considering it is harder for a competitor to lucifer an array of interlocked activities than it is merely to replicate an individual activity. Thus, "positions built on systems of activities are far more sustainable than those built on individual activities" (p. 73). The more a company's positioning rests on activity systems with 2d- and third-order fit, the more sustainable its advantage will exist. Such systems are difficult to untangle and imitate even if the competitors are able to identify the interconnections. Further, a competitor benefits very little by imitating just a few activities within the whole system. Thus, achieving fit is an arduous task equally it means integrating decisions and deportment across many independent subunits.

Additionally, fit amidst activities creates pressures and incentives to ameliorate operational effectiveness, which makes imitation even harder. Fit means that poor performance in one activity will dethrone the performance in others, and so that weaknesses are exposed and more than prone to get attending. On the other hand, improvements in ane activity will "pay dividends in others" (p. 74).

Strategic positions should take a horizon of a decade or more, non of a single planning wheel, as continuity promotes improvements in private activities and the fit beyond activities, allowing an organization to build unique capabilities and skills custom-fitted to its strategy. Continuity also reinforces a company's identity. Frequent shifts in strategy are not only costly but inevitably leads to hedged activity configurations, inconsistencies across functions, and organizational dissonance.

Thus, strategy can too exist defined as creating fit amidst a company's activities equally the success of a strategy depends on doing many things well - not just a few - and integrating among them. If there is no fit among activities, there is no distinctive strategy and little sustainability.

Alternate Views of Strategy
The Implicit Strategy Model of the Past Decade	Sustainable Competitive Reward
I platonic competitive position in the manufacture	Unique competitive position for the visitor
Benchmarking of all activities and achieving best practice	Activities tailored to strategy
Aggressive outsourcing and partnering to proceeds efficiencies	Articulate merchandise-offs and choices vis-a-vs competitors
Advantages rest on a few key success factors, critical resources, and cadre competencies	Competitive advantage arises from fit beyond activities
Flexibility and rapid responses to all competitive market changes	Sustainability comes from the activity system, not the parts
	Operational effectiveness a given

V. Rediscovering Strategy

Failure to Cull

According to Porter, although external changes tin pose a threat to a company's strategy, a greater threat to strategy oft comes from within the company. "A sound strategy is undermined by a misguided view of contest, by organizational failures, and, especially, by the desire to abound" (p. 75). Moreover, the fundamental trouble lies in the "best-exercise" mentality of the managers, who believe in making no trade-offs, incessantly pursuing operational effectiveness, and imitating competitors to take hold of up in the race for operational effectiveness. Thus, managers simply do non understand the need to have a strategy.

The Growth Trap

"Amongst all other influences, the want to grow has perhaps the most perverse effect on strategy" (p. 75). Companies often grow by extending their product lines, calculation new features, imitating competitors' popular services, matching processes, and making acquisitions. However, nigh companies start with a unique strategic position involving clear trade-offs. Nevertheless, with the passage of time and the pressures of growth, companies are led to make compromises, which were at first, almost ephemeral. Thus, through a succession of incremental changes, which seemed sensible at the time, companies have compromised their way to homogeneity with their rivals. Compromises and inconsistencies in the pursuit of growth eventually erode the competitive advantage of a company and their uniqueness. Rivals continue to match each other until desperation breaks this vicious cycle, and results in a merger or downsizing to the original positioning.

Co-ordinate to Porter, efforts to grow blur uniqueness, creates compromises, reduces fit, and ultimately undermines competitive advantage.

Profitable Growth

1 approach to persevering growth and reinforcing strategy is to concentrate on deepening a strategic position rather than broadening and compromising information technology. A company can do and so by leveraging the existing activity system by offering features or services that rivals would observe incommunicable or costly to match on a stand up-alone footing. Thus, deepening a position means making the company's activities more distinctive, strengthening fit, and communicating strategy better to those customers who value it. Merely currently many companies endeavor to grow past calculation hot features, products, or services without adapting them to their strategy.

Globalization often allows growth that is consistent with a company's strategy, as information technology opens larger markets for a focused strategy. Thus, expanding globally is more likely to reinforce a company's unique position than broadening domestically.

The Role of Leadership

"The challenge of developing or reestablishing a articulate strategy is frequently primarily an organizational one and depends on leadership" (p. 77). Moreover, potent leaders, who are willing to brand choices, are essential. Full general management should do more than just stewardship of individual functions. They should define and communicate the core company'south unique position, make trade-offs, and forge fit amidst the various activities of the company. Further, the leader should decide which changes in the manufacture and client demands, is the company going to answer to. The leader should exist able to teach others in the organization about strategy - and to say no.

Strategy is almost choosing what to do besides as what not to practice. Deciding which target group of customers, varieties, and needs the visitor should serve is fundamental to developing a strategy. Strategy is also yet, in deciding not to serve other customers or needs and non to offer certain features or services. Thus, strategy requires continuous discipline and articulate communication. Strategy should guide employees in making choices that arise because of trade-offs in their private activities and in twenty-four hours-to-day decisions.

Moreover, managers need to empathize that operational effectiveness, although a necessary part of management, is not strategy. Managers should be able to clearly distinguish between the two.

Conclusion

"Strategic continuity does non imply a static view of competition. A company must continually improve its operational effectiveness and actively try to shift the productivity frontier; at the same fourth dimension, there needs to be ongoing effort to extend its uniqueness while strengthening the fit amidst its activities" (p. 78). All the same, a company may have to change its strategic position due to a major structural change in the industry. A company should choose its new position depending on its ability to observe new trade-offs and leverage a new organisation of complementary activities into a sustainable reward.

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