What is Strategy? (Porter 1996)

Posted on October 22, 2010 | 1 Comment

Title:	What is Strategy?
Status:	In review , [UUID]
Author:	Michael E Porter+
Source:	Harvard Business Review, November-December: 61-78
Keyword:	Strategy+, Operational Effectiveness+, Strategic Positioning+, Core Competence+
Citation:	Porter 1996+
	Michael E Porter, (1996) “What is Strategy?“, Harvard Business Review, November-December: 61-78 BibTeX,Scholar

Michael Porter is associated with the positioning school (Mintzberg 2002:23), who’s analytical approach sees strategy making mainly based on a process to identify drivers(forces) of intra-industry competition and its corresponding barriers. His reasoning is based on the assumption that a company who deliberately choose a position within an industry and at the same time is able to combine activities in a different fashion, can create sustainable competitive advantages that will lead to profitability and with it sustain competition.

Aside this more general position of Porter, in an article from 1996, he asks “What is Strategy” and discussed operational efficiency in connection with strategy making and he advised that those two things should not (can not) be used interchangeably.

Below their is a summary of Porter’s main arguments from his article and what he sees as main components on strategy and how to distinguish between operational efficiency and strategy. 

SUMMARY

The ability the make an informed decision about how, when and where to target a customer group, facilitate resources and set objectives(limits) makes the difference between a manager who thinks from a strategic perspective in light of what might emerge in future. Anticipating those movements into current decision-making helps to set a stage to create sustainable advantages.

Porter argues that positioning is still a notable way to shape advantages within a company and sees hypercompetition as rather odd concept to explain shifting patterns in competition and points out that a misunderstanding exists to distinguish between operational effectiveness and strategy. The replacement of strategy by so-called management tools has been responsible why many firms have increased operational effectiveness but have been unable to translate those improvements into values for customer where profit can be earned and profitability be increased.

Differences in profitability compared with competitors arises because of activities chosen in order to deliver customer value. Those can be either that similar activities are combined on a much lower cost base (unit cost) or the average unit price is higher due to superior perceived value.

Operational effectiveness is not strategy

Porter refers to operational effectiveness (OE) as the means of performing similar activities better than rivals and strategic positioning as the means to perform activities in a different way. He uses the Japanese manufacturing during the 1980’s as example to show that operational effectiveness can be responsible for lower cost and superior quality among those Japanese companies but question a unique strategic position of those companies.

He shows that an industry (Japanese electronic industry) has worked as cluster of competitors within this industry. The Japanese companies could not win market share within their own industry because most companies employed similar processes and methodology and had a similar cost-base therefore the strategic decision of those firms was to go a broad and compete outside of Japan where operational effectiveness seemed to be a strategic advantage.

He borrowed a concept from economics (possible production frontier) to introduce what he called productivity frontier to show a frontier curve for a maximum possible productivity (value) on a selected process. The combination of used methods (activities) with inputs allows to assign cost factors to demonstrate a companies relative productivity position. Based on a company’s input and its used methods the cost factor can be compared with other best practices and indicate their operational effectiveness.

The pure reliance on operational effectiveness as strategy replacement works only as long competitors not employing to same process and improvements but as soon those best practices are made common within the industry, operational effectiveness becomes mutual destructive and counter-productive with imitations and homogeneity as end result.

Strategy rest on unique activities

Porter postulates that “real” competitive strategy can only be about being different with deliberately choosing a different way to deliver a mix of values and activities.

Southwest Airlines found a position as provider for low-cost low-thrill, standardized provider of flights within US for a value-based but low-cost position where other airlines have difficulties to met the same cost structure and activities and therefore can not compete on the chosen activity-value combination.

Ikea is cited as example that chooses a position as low-cost provider within the furniture industry where customer are targeted under a self-serving model. The combination of functional design, streamlined manufacturing and a modular furniture system have been successful deployed to gain scale economies and a lower cost base. Those combined activities are different to established service oriented activities within this furniture industry. Targeted on do-it-yourself, young families that look for contemporary design and a possibility to combine various furniture into an individual style served as strategic position, taken into account that the service factor has been deliberately altered by choosing a value-cost model, large store displays and self delivery to fit the chosen image.

Strategic positioning as a guiding factor to find positions that are new or not filled by products or customers and while not easy to be identifiable, a managers ability to combine creativity, vision, method and technology to a unique set of activities to be valuable for both the company and its customer makes it an outstanding intellectual challenge.

Porter divides between variety-based positioning,needs-based positioningand access-based positioning. He defines variety-based positioning as a selection process where products are selected due to superior value chain optimization that produces a specialized product within an industry segment. Its reliable performance and consistency makes it a subset of choices for customers to full fill a sufficient need.

Serving all needs on a particular customer segment, is named by Porter as needs-based positioning with a customer in mind that wants to reduce search cost and looks for a solution from one provider with tailoring service.

Thus building a platform of activities that can deliver solutions for various needs and at the same time can be differentiated from competitors is vital to serve as competitive advantages.

Strategy is about finding a unique position by combining a unique set of activities

A Sustainable strategic position requires trade-off’s

Porter argues that only the optimal (right) mix of activities is responsible to maintain sustainable advantages and this optimum comes with trade-off’s that will not allow every company to participate fully. This implies that a company should know its limits and that it should know that certain sacrifices can not be made without putting other activities behind. Those trade-off’s occur when activities are incompatible[Porter 1996:68] and might come from missing skills, heritage, inoperable change management etc..

Imitators are by far the biggest threat for a company’s position, to protect one’s position choices have to be made, barriers to be raised to ensure their are not easily to overcome. Barriers such as image, technology or intellectual property can help to protect but they need constant review in terms of diffusion and adoption and operational effectiveness can be excluded as potential barrier since diffusion rate is far to high to be a lasting factor.

Benchmarking can be used as yardstick to see current conditions of the productivity frontier within an industry but rather to see as a tool to imitate and improve operational efficiency it should be used as method to identify activities that can done differently. Benchmarking as tool but not loose sight on developments in terms of industry wide quality improvements and technological advancements.

Continental Airlines failed an attempt with Continental Lite to maintain a full-service image while challenging and imitate Southwest Airlines business concept.Neutrogena‘s rigorous decision not to alter its image (research based, medical proved soap) and maintain a unique position with manufacturing processes that does not uses deodorants or skin softener, put product attributes over manufacturing efficiency.

Porter’s sees it as inevitable that choices are made that limit a companies offering, reach and availability to ensure focused activities by not being everything to everybody.

Strategy is about choices and about what not do.

Fit drives both competitive advantage and sustainability

The right mix or as Porter’s puts it strategy is about combining activities[Porter 1996:70], synergies that come from combining the right activities and leave other activities aside are essential part of the strategy making equation.

Core competence and key success factors are components but only connection of a fit with other complementary activities that full fill a companies mission to accelerate competitive advantage and profitability.

Most companies in the same industry carry out similar activities but the company with the best fit on complementary activities along the value chain can claim better integration and therefore can reach a better cost base(supply) or a distinguishable customer relationship(demand). Those two factors are main components to profitability.

Porter distinguish three types of fits; simple consistency fit, activities reinforcing fit and optimization of effort fit. Create consistency among functional activities throughout the company to serve the main strategic goals, an ability to reinforce activities and communication and optimize activities on a constant basis to identify waste and eliminate redundancy. Stately reiterate the question on how to do better and eliminate redundancy to renew fit between internal capabilities and the external environment.

He warns that focusing too much on core competence and success factors without taken every individual activity into account can lead to false interpretation of a company’s strength in terms of its capability and resources. The reduction on core competencies simplifies the organizational view but at the same time clouds the understanding of interconnection of visible and non visible functional activities.

Unrevealing those connections, Porter suggests an activity mapping as analytical process to visualization and illustration of those interrelation. Always with the idea in mind that a company is a chain of activities also known as value chain.

Porter suggest that those interconnections are the heart of any strategy, as those links (chains) are hard to imitate therefore lead to sustainability which is an ultimate goal of strategy otherwise it would be just tactical manoeuvre to overcome a barrier.

A company that focuses on a system of activities [Porter 1996:73] as competitive barrier rather than individual selected activities (technologies, resources, skills) seems more likely to sustain and build competitive advantages over a time.

Technology, capital or skills are important but not everything to achieve competitive advantage. Interconnections between assets and its functional execution is as of similar importance. This includes the ability on how to reach decisions, what to communicate etc. all are part of a system of activities serving a particular goal and mission.

Coordinating and executing this system of activities is the real strategic capability of any organization as it requires long-term commitment and a positioning that looks beyond currents trends and short-term goals.

Strategy is about finding complementary activities that create an internal and external fit.

Rediscovering strategy

The failure to choose a strategic position, the misunderstanding of competition and its related forces, organizational mismanagement, the reliance on technology and the desire to grow exponentially are examples for unsuccessful strategy making and execution.

Best practice and operational effectiveness have been seen as substitute and barometer for success and misleading the direction in building a position that is different from others and would make imitation difficult.

Growth as policy driver is useful as long as it serves the strategic position and not dilutes the focus. Reaching a broader customer group can alter one’s unique position and image. Using M&A strategies to foster growth objectives without adding additional values for the existing activities will have similar effects, dilution. Porter describes this as growth trap and cites Neutrogena and Maytagas examples.

He asks for courage and leadership to make deliberate decisions to limit a companies reach and at the same sharpen its focus. He remind us that improving operational effectiveness is a necessary part of management, but it is not strategy[Porter 1996:78] and only the continues effort to find a unique position will ensure a competitive standing and profitability.

REFERENCE

Michael E Porter, (1996) “What is Strategy?”, Harvard Business Review, November-December: 61-78

Henry Mintzberg, Sumantra Ghoshal, Joseph B Lampel, James B Quinn (2002) “The Strategy Process: Concepts, Context, Cases”,4th Edition, Prentice Hall