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CLASSIC READINGSWHAT IS STRATEGY?
PORTER – WHAT IS STRATEGY?
! At general management’s core is strategy: defining a company’s position, making trade-offs, and forging fit among activities
POSITIONING
- The root of the problem is the failure to distinguish between operational effectiveness and strategy.
Operational effectiveness and strategy are both essential to superior performance, which, after all, is the primary
goal of any enterprise. But they work in very different ways.
A company can outperform rivals only if it can establish a difference that it can preserve.
Operational effectiveness (OE):
= Performing similar activities better than rivals perform them.
Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it
is not usually sufficient:
1. Competitors can quickly imitate.
OE competition shifts the productivity frontier (= the sum of all existing best practices at any given
time) outward, effectively raising the bar for everyone. But although such competition produces
absolute improvement in operational effectiveness, it leads to relative improvement for no one.
2. Competitive convergence.
Strategies converge and competition becomes a series of races down identical paths that no one
can win.
Competition based on operational effectiveness alone is mutually destructive, leading to wars of attrition that
can be arrested only by limiting competition. Driven by performance pressures but lacking strategic vision,
company after company has had no better idea than to buy up its rivals. After a decade of impressive gains in
operational effectiveness, many companies are facing diminishing returns.
Strategic positioning:
= Performing different activities from rivals’ or performing similar activities in different ways.
The essence of strategy is in the activities.
Strategic positions emerge from three distinct sources:
1. Variety-based positioning:
= Producing a subset of an industry’s products or services.
2. Needs-based positioning:
= Serving most or all the needs of a particular group of customers.
A variant of needs-based positioning arises when the same customer has different needs on different
occasions or for different types of transactions.
Differences in needs will not translate into meaningful positions unless the best set of activities to
satisfy them also differs.
3. Access-based positioning:
= Segmenting customers who are accessible in different ways.
Access can be a function of customer geography or customer scale – or of anything that requires a
different set of activities to reach customers in the best way.
Less common and less well understood than the other two bases.
Positioning is not only about carving out a niche. A position emerging from any of the sources can be
broad or narrow.
Whatever the basis – variety, needs, access, or some combination of the three – positioning requires a
tailored set of activities because it is always a function of differences on the supply side; that is, of
differences in activities. However, positioning is not always a function of differences on the demand, or
customer, side. Variety and access positionings, in particular, do not rely on any customer differences. In
practice, however, variety or access differences often accompany needs differences.
,A SUSTAINABLE STRATEGIC POSITION REQUIRES TRADE-OFFS
- Strategy is the creation of a unique and valuable position, involving a different set of activities.
- A sustainable strategic position requires trade-offs: -> The essence of strategy is choosing what not to do.
Choosing a unique position is not enough to guarantee a sustainable advantage. A valuable position will attract
imitation by incumbents, who are likely to copy it in one of two ways:
1. A competitor can reposition itself to match the superior performer.
2. Straddling (more common): the straddler seeks to match the benefits of a successful position while
maintaining its existing position.
But a strategic position is not sustainable unless there are trade-offs with other positions.
o Trade-offs occur when activities are incompatible -> more of one thing necessitates less of another.
o Trade-offs create the need for choice and protect against repositioners and straddlers.
o Trade-offs arise for three reasons:
1. From inconsistencies in image or reputation:
A company known for delivering one kind of value may lack credibility and confuse customers – or
even undermine its reputation – if it delivers another kind of value or attempts to deliver two
inconsistent things at the same time.
2. From activities themselves:
Many trade-offs reflect inflexibilities in machinery, people, or systems.
In general, value is destroyed if an activity is overdesigned or underdesigned for its use.
Productivity can improve when variation of an activity is limited.
3. From limits on internal coordination and control:
Companies that try to be all things to all customers risk confusion in the trenches as employees
attempt to make day-to-day operating decisions without a clear framework.
o ! Trade-off are essential to strategy. They create the need for choice and purposefully limit what a company
offers.
o In general, false trade-offs between cost and quality occur primarily when there is redundant or wasted
effort, poor control or accuracy, or weak coordination.
o Simultaneous improvement of cost and differentiation is possible only when a company begins far behind the
productivity frontier or when the frontier shifts outward. At the frontier, where companies have achieved
current best practice, the trade-off between cost and differentiation is very real indeed.
FIT DRIVES BOTH COMPETITIVE ADVANTAGE AND SUSTAINABILITY
- While operational effectiveness is about achieving excellence in individual activities, or functions, strategy is about
combining activities.
- Fit locks out imitators by creating a chain that is as strong as its strongest link.
Fit is important because discrete activities often affect one another.
The activities should complement one another in ways that create real economic value.
That is the way strategic fit creates competitive advantage and superior profitability.
The most valuable fit is strategy-specific because it enhances a position’s uniqueness and amplifies trade-offs.
The fit among activities substantially reduces cost or increases differentiation.
Types of fit (not mutually exclusive):
1. First-order fit: simple consistency between each activity (function) and the overall strategy:
Consistency ensures that the competitive advantage of activities cumulate and do not erode or cancel
themselves out. It makes the strategy easier to communicate to customers, employees, and share-
holders, and improves implementation through single-mindedness in the corporation.
Activity-system maps: show how a company’s strategic position is contained in a set of tailored activities
designed to deliver it.
2. Second-order fit: reinforcing activities.
3. Third-order fit: optimization of effort:
Coordination and information exchange across 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 than any individual part. -> Competitive advantage grows out
of the entire system of activities.
,- Fit and sustainability:
Strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability
of that advantage. It is harder for a rival to match an array of interlocked activities than it is merely to imitate a
particular sales-force approach, match a process technology, or replicate a set of product features. Positions build
on systems of activities are far more sustainable than those built on individual activities.
The more a company’s positioning rests on activity systems with second- and third-order fit, the more sustainable
its advantage will be.
Such systems, by their very nature, are usually difficult to untangle from outside the company and therefore
hard to imitate.
Achieving fit is difficult because it requires the integration of decisions and actions across many independent
subunits.
Fit among a company’s activities creates pressures and incentives to improve operational effectiveness, which
makes imitation even harder.
! One implication is that strategic positions should have a horizon of a decade or more, not of a single planning
cycle.
Continuity fosters improvements in individual activities and the fit across activities, allowing an organization
to build unique capabilities and skills tailored to its strategy.
Continuity also reinforces a company’s identity.
Conversely, frequent shifts in positioning are costly.
- Strategy is creating fit among a company’s activities.
REDISCORVERING STRATEGY
- The threats to strategy:
External: changes in technology, the behavior of competitors, …
Internal (greater threat): misguided view competition, organizational failures, desire to grow, …
o When many companies operate far from the productivity frontier, trade-offs appear unnecessary.
o Managers imitate everything about their competitors. Exhorted to think in terms of revolution, managers
chase every new technology for its own sake.
o The pursuit of operational effectiveness is seductive because it is concrete and actionable.
o Caught up in the race for operational effectiveness, many managers simply do not understand the need to
have a strategy.
o Some managers mistake “customer focus” to mean they must serve all customer needs or respond to every
request from distribution channels.
o The desire to preserve flexibility.
o Trade-offs are frightening, and making no choice is sometimes preferred to risking blame for a bad choice.
o Companies imitate one another in a type of herd behavior, each assuming rivals know something they do not.
o Among other influences, the desire to grown has perhaps the most perverse effect on strategy. Trade-offs
and limits appear to constrain growth. Attempts to compete in several ways at once create confusion and
undermine organizational motivation and focus.
Broadly, the prescription is to concentrate on deepening a strategic position rather than broadening
and compromising it.
Deepening a position involves making the company’s activities more distinctive, strengthening fit,
and communicating the strategy better to those customers who should value it.
A company can often grow faster – and far more profitably – by penetrating needs and varieties
where it is distinctive than by slugging it out in potentially higher growth arenas in which the
company lacks uniqueness.
- The role of leadership:
The challenge of developing or reestablishing a clear strategy is often primarily an organizational one and depends
on leadership:
o Its core is strategy -> teach others in the organization about strategy – and to say no.
o Setting limits.
o Deciding which target group of customers, varieties, and needs the company should serve.
o Constant discipline and clear communication.
o Clearly distinguish operational effectiveness from strategy.
, GHEMAWAT – CHAPTER 1: THE ORIGINS OF STRATEGY
BACKGROUND
Ancient Greeks -> Military -> business context: 1 st IR “invisible hand”, 2nd IR emergence of strategy as a way to shape market
forces and affect the competitive environment, WWII supplied a vital stimulus to strategic thinking in business as well as in
the military domain because it sharpened the problem of allocating scarce resources across the entire economy -> learning
curves -> distinctive competence.
ACADEMIC UNDERPINNINGS
- Strategy was not explicitly invoked until the 1960s.
- 1908 Harvard: Managers should be trained to think strategically rather than just act as functional administrators.
- 1950s Harvard: Encouraged students to question whether a firm’s strategy matched its competitive environment.
- 1950s Harvard: Every business organization, every subunit of organization, and even every individual [ought to] have a
clearly defined set of purposes or goals which keeps it moving in a deliberately chosen direction and prevents its drifting
in undesired directions.
- 1960s: SWOT
- 1963: The strategic decision is concerned with the long-term development of the enterprise -> distinctive competence.
- 1960s: Corporate strategies that were heavily geared toward growth and diversification.
- 1960s: consciously serving the customer <-> defining the common thread in its business/ corporate strategy.
- 1960s: Strategies should be analyzed only on a case-by-case basis.
THE RISE OF STRATEGY CONSULTANTS
- Learning curve: the experience curve:
Developed to try to explain price and competitive behavior in the extremely
fast growing segments.
There appear to be rules for success, and they relate to the impact of
accumulated experience on competitors’ costs, industry prices and the
interrelation between the two.
The stability of competitive relationships should be predictable, the value of
market share change should be calculable, [and] the effects of growth rate should [also] be calculable.
- Portfolio planning: growth-share matrix
The basic strategy recommendation was to maintain a balance between “cash
cows” (mature businesses) and “stars” while allocating some resources to fund
“question marks” (potential stars). “Dogs” were to be sold off.
Vital to have a dominant market share in as many products as possible.
However, market share in slowly growing products can be gained only by
reducing the share of competitors who are likely to fight back.
- Strategic business units: A formal strategic planning system that would divide the company into “natural business
units”.
- Nine-block matrix:
- Profit Impact of Market Strategies: The regressions established what were
supposed to be benchmarks for the potential performance of SBUs with particular characteristics against which their
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