Porter Me (1996) What Is Strategy? Harvard Business Review

Summary by Aarti Nirgudka
Master of Accountancy Program,
University of Southward Florida, Summer 2002

I. Operational Effectiveness Is Not Strategy

According to Porter, various direction tools like full quality direction, benchmarking, time-based competition, outsourcing, partnering, reengineering, that are used today, do enhance 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 exist failure of direction to distinguish between operational effectiveness and strategy: Management tools accept taken the place of strategy.

Operational Effectiveness: Necessary only Non Sufficient

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

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

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

Porter states that a visitor can outperform rivals but if it can establish a divergence information technology can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both. Nonetheless, Porter argues that about companies today compete on the basis of operational effectiveness. This concept of competition based on operational effectiveness is illustrated via the productivity frontier, depicted in the effigy beneath.

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, management techniques, and purchased inputs. Thus, when a company improves its operational effectiveness, information technology moves toward the borderland. The frontier is constantly shifting outward every bit new technologies and direction approaches are developed and as new inputs become available. To continue upwardly with the continuous shifts in the productivity frontier, managers have adopted techniques like continuous comeback, empowerment, learning organization, etc. Although companies improve on multiple dimensions of performance at the same time equally they move toward the frontier, virtually of them fail to compete successfully on the ground of operational effectiveness over an extended period. The reason for this being that competitors are quickly able to imitate best practices like management techniques, new technologies, input improvements, etc. Thus, competition based on operational effectiveness shifts the frontier outward and effectively raises the bar for everyone. Just such competition only produces absolute improvement in operational effectiveness and no relative improvement for anyone.

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

II. Strategy Rests on Unique Activities

"Competitive strategy is about beingness dissimilar. 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 cosmos of a unique and valuable position, involving a different prepare of activities.

The Origins of Strategic Positions

Strategic positions emerge from three sources, which are not mutually exclusive and ofttimes overlap.

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

2. Needs-based positioning: Serves most or all the needs of a particular group of customers. It is based on targeting a segment of customers. Information technology arises when at that place are a group of customers with differing needs, and when a tailored set of activities can serve those needs all-time.

iii. Access-based positioning: Segmenting customers who are accessible in different ways. Although their needs are similar to those of other customers, the best configuration of activities to reach them is different. Access can exist a function of customer geography or customer scale or of anything that requires a different set of activities to reach customers in the all-time way.

Whatever the footing (multifariousness, needs, access, or some combination of the 3), positioning requires a tailored set of activities considering information technology is ever a role of differences in activities (or differences on the supply side). Positioning, moreover, is not always a function of divergence on the need (or client) side. For instance, variety and admission positionings exercise not rely on any customer differences.

III. A Sustainable Strategic Position Requires Trade-offs

According to Porter, a sustainable advantage cannot be guaranteed by simply choosing a unique position, as competitors will imitate a valuable position in i of the 2 following ways:

1. A competitor can choose to reposition itself to match the superior performer.

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

Thus, in club for a strategic position to be sustainable at that place must exist merchandise-offs with other positions. "A merchandise-off means that more of one affair necessitates less of another" (p. 68).

Trade-offs occur when activities are incompatible and arise for three reasons:

i. A visitor known for delivering i kind of value may lack credibility and confuse customers or undermine its own reputation by delivering another kind of value or attempting to evangelize two inconsistent things at the same fourth dimension.

2. Trade-offs arise from activities themselves. Unlike positions require different product configurations, different equipment, different employee behavior, dissimilar skills, and different management systems. In general, value is destroyed if an activeness is over designed or nether designed.

3. Merchandise-offs arise from limits on internal coordination and command. By choosing to compete in i way and non the other, management is making its organizational priorities clear. In contrast, companies that attempt to be all things to all customers, often risk confusion amidst its employees, who and then effort to make 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 trade-offs in competing. The essence of strategy is choosing what non to do.

IV. Fit Drives Both Competitive Advantage and Sustainability

Positioning choices determine not just which activities a company volition perform and how it will configure private activities just likewise how activities relate to ane another. While operational effectiveness focuses on individual activities, strategy concentrates on combining activities.

"Fit locks out imitators by creating a chain that is as stiff as its strongest link" (p. 70). Fit, as per Porter, is the key component of competitive advantage because detached activities often bear upon one some other.

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:

i. Start-order fit: Simple consistency betwixt each activity (part) and the overall strategy. Consistency ensures that the competitive advantages of activities cumulate and do 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.

ii. 2d-order fit: Occurs when activities are reinforcing.

3. Third-club fit: Goes beyond activeness reinforcement to what Porter refers to as optimization of effort. Coordination and information exchange across activities to eliminate redundancy and minimize wasted effort are the about basic types of try optimization.

In all three types of fit, the whole matters more than any individual office. Competitive advantage stems from the activities of the entire system. The fit among activities substantially reduces cost or increases differentiation. Moreover, according to Porter, companies should retrieve in terms of themes that pervade many activities (i.e., low cost) instead of specifying individual strengths, core competencies or critical resources, as strengths cut across many functions, and one strength blends into others.

Fit and Sustainability

Strategic fit is key not simply to competitive advantage only as well to the sustainability of that reward because it is harder for a competitor to friction match an array of interlocked activities than information technology is only to replicate an individual activity. Thus, "positions congenital on systems of activities are far more sustainable than those congenital on individual activities" (p. 73). The more a company's positioning rests on activity systems with second- and third-order fit, the more sustainable its reward will exist. Such systems are difficult to untangle and imitate even if the competitors are able to place the interconnections. Further, a competitor benefits very trivial past imitating just a few activities within the whole system. Thus, achieving fit is an backbreaking task as information technology ways integrating decisions and actions beyond many independent subunits.

Additionally, fit amid activities creates pressures and incentives to improve operational effectiveness, which makes fake even harder. Fit ways that poor performance in i activity will degrade the performance in others, so that weaknesses are exposed and more prone to get attention. On the other paw, improvements in ane activeness will "pay dividends in others" (p. 74).

Strategic positions should have a horizon of a decade or more, not of a unmarried planning cycle, equally continuity promotes improvements in individual activities and the fit across 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 tin also be divers as creating fit among a company'due south activities equally the success of a strategy depends on doing many things well - non just a few - and integrating amidst them. If there is no fit among activities, there is no distinctive strategy and footling sustainability.

Alternating Views of Strategy
The Implicit Strategy Model of the By Decade	Sustainable Competitive Advantage
One platonic competitive position in the manufacture	Unique competitive position for the company
Benchmarking of all activities and achieving best practice	Activities tailored to strategy
Ambitious outsourcing and partnering to gain efficiencies	Clear merchandise-offs and choices vis-a-vs competitors
Advantages rest on a few primal success factors, critical resources, and core competencies	Competitive advantage arises from fit across activities
Flexibility and rapid responses to all competitive marketplace changes	Sustainability comes from the activity system, not the parts
	Operational effectiveness a given

V. Rediscovering Strategy

Failure to Choose

Co-ordinate to Porter, although external changes can pose a threat to a visitor's strategy, a greater threat to strategy often comes from within the company. "A sound strategy is undermined past a misguided view of competition, by organizational failures, and, especially, past the desire to grow" (p. 75). Moreover, the fundamental trouble lies in the "all-time-exercise" mentality of the managers, who believe in making no merchandise-offs, incessantly pursuing operational effectiveness, and imitating competitors to catch upward in the race for operational effectiveness. Thus, managers simply do not understand the demand to have a strategy.

The Growth Trap

"Among all other influences, the want to grow has possibly the nearly perverse effect on strategy" (p. 75). Companies often grow past extending their product lines, adding new features, imitating competitors' popular services, matching processes, and making acquisitions. However, almost companies commencement with a unique strategic position involving clear trade-offs. Withal, with the passage of time and the pressures of growth, companies are led to make compromises, which were at first, most imperceptible. Thus, through a succession of incremental changes, which seemed sensible at the time, companies take 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 proceed to lucifer each other until desperation breaks this vicious cycle, and results in a merger or downsizing to the original positioning.

According to Porter, efforts to grow blur uniqueness, creates compromises, reduces fit, and ultimately undermines competitive reward.

Profitable Growth

One approach to persevering growth and reinforcing strategy is to concentrate on deepening a strategic position rather than broadening and compromising information technology. A company tin can do so by leveraging the existing activity organization by offering features or services that rivals would notice impossible or costly to friction match on a stand-lone footing. Thus, deepening a position means making the company's activities more than distinctive, strengthening fit, and communicating strategy better to those customers who value it. But currently many companies endeavour to abound by adding hot features, products, or services without adapting them to their strategy.

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

The Role of Leadership

"The claiming of developing or reestablishing a clear strategy is oft primarily an organizational one and depends on leadership" (p. 77). Moreover, stiff leaders, who are willing to make choices, are essential. General management should do more than than just stewardship of individual functions. They should define and communicate the cadre company'south unique position, make trade-offs, and forge fit amidst the various activities of the company. Farther, the leader should decide which changes in the industry and customer demands, is the company going to answer to. The leader should be able to teach others in the organization about strategy - and to say no.

Strategy is about choosing what to do too equally what not to practise. Deciding which target group of customers, varieties, and needs the company should serve is fundamental to developing a strategy. Strategy is likewise however, in deciding non to serve other customers or needs and non to offer certain features or services. Thus, strategy requires continuous discipline and clear communication. Strategy should guide employees in making choices that arise considering of trade-offs in their individual activities and in day-to-24-hour interval decisions.

Moreover, managers need to empathize that operational effectiveness, although a necessary role of direction, is not strategy. Managers should be able to conspicuously distinguish betwixt the 2.

Conclusion

"Strategic continuity does not imply a static view of competition. A company must continually amend its operational effectiveness and actively endeavour to shift the productivity borderland; at the aforementioned time, there needs to be ongoing try to extend its uniqueness while strengthening the fit among its activities" (p. 78). Still, 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 find new merchandise-offs and leverage a new organisation of complementary activities into a sustainable reward.

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