October 4 , 2012
CLASS 9: Business Plan Strategies
What is Strategy by Michael E. Porter.
o Publication: Harvard Business Review Nov/Dec96, Vol. 74, Issue 6
I. Operational Effectiveness Is Not Strategy
• New set of rules: Companies must be flexible to respond rapidly to competitive and market changes.
o Must benchmark continuously to achieve best practice.
o Outsource aggressively to gain efficiencies.
o Nurture a few core competencies in the race to stay ahead of rivals.
• Positioning – rejected, too static for today's dynamic markets and changing technologies.
o Rivals can quickly copy any market position, and competitive advantage is temporary.
• Barriers to competition are falling, regulation eases and markets become global.
• Hypercompetition – selfinflicted wound, not the inevitable outcome of changing paradigm of competition.
• Failure to distinguish between operational effectiveness and strategy.
• Productivity, quality, speed management tools, techniques: total quality management, benchmarking, timebased competition,
outsourcing, partnering, reengineering, change management.
Operational Effectiveness: Necessary but Not Sufficient
• Primary goal of enterprise: Operational effectiveness and strategy. But work in very different ways.
• Superior profitability: delivering greater value => charge higher average unit prices; greater efficiency => lower average unit
• Operational effectiveness (OE) performing similar activities better than rivals perform them; efficiency
o differences in profitability, directly affect relative cost positions and levels of differentiation
o E.g. better utilize its inputs by reducing defects in products, developing better products faster
• Strategic positioning – performing different activities from rivals' or similar activities in different ways.
OE competition shifts the productivity frontier outward
• Improve OE require capital investment, different personnel, or simply new ways of managing.
o insufficient competitive convergence is more subtle and insidious. o The more benchmarking companies do, the more they look alike. As rivals imitate one another's improvements in quality,
cycle times, or supplier partnerships, strategies converge
o Result is zerosum 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 being different, choosing a different set of activities to deliver unique mix of value.
• Southwest Airlines Company – offers shorthaul, lowcost, pointtopoint service, convenient
o Avoids large airports; Frequent departures with fewer aircraft; fly longer hours than rivals
o Doesn’t offer meals, assigned seats, interline baggage checking, premium classes of service
• Ikea – Swedish global furniture retailer, clear strategic positioning, perform activities differently from rivals
o Ikea targets young furniture buyers who want style at low cost, instore child care, extended hours
o selfservice model based on clear, instore displays, roomlike
o lowcost, modular, readytoassemble furniture to fit its positioning. The Origins Strategic Positions
• Strategic positions based on producing a subset of an industry's products or services
• Varietybased positioning based on choice of product/service varieties, not customer segments; can best produce
particular products or services using distinctive sets of activities; meet subset of needs
• Jiffy Lube automotive lubricants, no other car repair or maintenance services, faster service at lower cost
• Vanguard Group mutual fund industry; good, predictable performance and rockbottom expenses.
o Known for its index funds. Fund managers keep trading levels low, which holds expenses down • Needsbased positioning serving most or all the needs of a particular group of customers (e.g. Ikea)
• A variant of needsbased positioning arises when the same customer has different needs on different occasions or for different
types of transactions.
• Accessbased positioning Access can be a function of customer geography or customer scaleor of anything that requires
a different set of activities to reach customers in the best way; less common
o Rural vs. Urbanbased customers
• Strategy is the creation of a unique and valuable position, involving a different set of activities.
o The essence of strategic positioning is to choose activities that are different from rivals'.
o If the same set of activities were best to produce all varieties, meet all needs, and access all customers, companies
could easily shift among them and operational effectiveness would determine performance.
III. A Sustainable Strategic Position Requires Tradeoffs
• First, a competitor can reposition itself to match the superior performer.
o E.g. J.C. Penney repositioning itself from Sears, more upscale, fashionoriented, softgoods retailer
• A second and far more common type of imitation is straddling.
o The straddler seeks to match the benefits of a successful position while maintaining its existing position. It grafts new
features, services, or technologies onto the activities it already performs.
• Strategic position not sustainable unless there are tradeoffs with other positions – incompatible, more of one thing necessitates
less of another; pervasive in competition, essential to strategy o 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.
o Tradeoffs create the need for choice and protect against repositioners and straddlers.
o Tradeoffs arise for three reasons:
inconsistencies in image or reputation;
arise from activities themselves. Different positions (with their tailored activities) require different product
configurations, different equipment, different employee behavior, different skills, and different management
limits on internal coordination and control.
• False tradeoffs between cost & quality redundant/wasted effort, poor control/accuracy, weak coordination.
IV. Fit Drives Both Competitive Advantage and Sustainability
• Operational effectiveness excellence in individual activities/functions; strategy combining activities
o E.g. Southwest – rapid gate turnaround, strategy: wellpaid gate and ground crews, no meals, no seat assignment, no
Types of Fit
• Fit locks out imitators by creating a chain that is as strong as its strongest link.
• Firstorder fit is simple consistency between each activity (function) and the overall strategy.
• Secondorder fit occurs when activities are reinforcing.
o Neutrogena's medical, hotel marketing activities reinforce one another, lower total marketing costs.
• Thirdorder fit is optimization of effort.
o The Gap restocking daily, thereby minimizing the need to carry large instore inventories.
• fit among activities substantially reduces cost or increases differentiation.
Fit and Sustainability
• It is harder for a rival to match an array of interlocked activities than it is merely to imitate a particular salesforce approach, match a
process technology, or replicate a set of product features.
• Positions built on systems of activities (2 /3r order fit) are far more sustainable than those built on individual activities.
• What is strategy ? Strategy is creating fit among a company's activities. 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
• Management reverts to the simpler task of overseeing independent funct