What is strategy according to Michael E. Porter
This post reviews the article What is strategy? by Michael E. Porter in HBR Magazine from November-December 19961.
the essence of strategy is choosing a unique and valuable position rooted in systems of activities that are […] difficult to match
making trade-offs among activities is critical to the sustainability of a strategy
Operational effectiveness is not strategy
A new set of beliefs has emerged that leads to mutually destructive competition. They are an outcome of mixing operational effectiveness and strategy.
A company can outperform rivals only if it can establish a difference that it can preserve.
all differences between companies in cost or price derive from the hundreds of activities required to create, produce, sell, and deliver their products or services […] Cost is generated by performing activities, and cost advantage arises from performing particular activities more efficiently than competitors.
Operational effectiveness means doing activities better than the competition, while strategic positioning means doing different activities than the competition.
Practices that improve operational effectiveness spread rapidly throughout an industry and therefore cannot be the source of sustained competitiveness. Furthermore, extensive benchmarking and too much focus on continuous improvement tends to make companies look alike more and more.
Strategy rests on unique activities
Strategic positions can be a combination of:
- variety-based positioning: offering only a subset of an industry’s products or services
- needs-based positioning: service only a segment of customers
- access-based positioning: based on geography or population density
In all cases the strategic advantage stems from being able to focus on a distinct set of activities. Without that distinction the segmentation does not translate into an advantage.
Porter’s answer to the question “What is strategy?”:
Strategy is the creation of a unique and valuable position, involving a different set of activities.
A sustainable strategic position requires trade-offs
A strategic position is not sustainable unless there are trade-offs with other positions. Trade-offs occur when activities are incompatible.
Trade-offs come in several varieties:
- Inconsistency in image or reputation
- Need for different equipment, employee behavior, skills etc.
- Over- or underdesigned activity for its use
- Limits on internal coordination and control
The question “How easy is it for a competitor to copy the approach?” can help to assess the strategic value of the trade-off.
The essence of strategy is choosing what not to do.
Fit drives both competitive advantage and sustainability
a whole system of activities, not a collection of parts
The activities reinforce and strengthen each other — this is described with the term fit.
Fit can show up in increasing order of sophistication:
- consistency between each activity and the overall strategy
- mutually reinforcing activities
- optimization of effort, for example through product design or coordinated information exchange
The more connected such a system is, the harder it is to copy by a competitor.
Strategy is creating fit among a company’s activities.
Rediscovering strategy: the failure to choose
Caught up in the race for operational effectiveness, many managers simply do not understand the need to have a strategy.
As by definition parts of the market are not addressed there seems to be an obvious target for pursuing growth. But this would come at the expense of the competitive advantage given by the system of activities that are the result of a strategic choice.
Thus leadership plays a crucial role in staying true to the core strategy.
one of the leader’s job is to teach others in the organization about strategy — and to say no.
one of the most important functions of an explicit, communicated strategy is to guide employees in making choices that arise because of trade-offs in their individual activities and in day-to-day decisions.
Reconnecting with strategy
The article provides a few questions that help to (re-)connect with strategy:
- Which of our product or service varieties are the most distinctive?
- Which of our product or service varieties are the most profitable?
- Which of our customers are the most satisfied?
- Which customers, channels, or purchase occasions are the most profitable?
- Which of the activities in our value chain are the most different and effective?
This defines the core of uniqueness.
Appendices
Key concepts and terms
Here are a few terms and key concepts that have been used in the article:
- competitive advantage, sustainability of
- profitability, sustainable
- strategy
- operational effectiveness
- mutually destructive competitive battles
- superior performance
- core competencies
- critical resources
- strategic choices
- productivity frontier: maximum value that can be created at a given cost
- operational effectiveness
- strategic positioning
- lower cost
- superior quality
- trade-off
- activities system
| Operational effectiveness | Strategy |
|---|---|
| Continuous improvement | Trade-offs & Choice |
| Productivity frontier | activities system |
| Fit |