Porter Michael E â€å“what Is Strategy?ã¢â‚¬â Harvard Business Review November/ December 1996 61-78

Summary past Aarti Nirgudka
Master of Accountancy Program,
University of South Florida, Summer 2002

I. Operational Effectiveness Is Not Strategy

According to Porter, various direction tools like total quality management, benchmarking, fourth dimension-based contest, outsourcing, partnering, reengineering, that are used today, practice raise and dramatically improve 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 management to distinguish between operational effectiveness and strategy: Management tools have taken the place of strategy.

Operational Effectiveness: Necessary merely Not Sufficient

Although both operational effectiveness and strategy are necessary for the superior performance of an organization, they operate in unlike ways.

Operational Effectiveness: Performing similar activities meliorate than rivals perform them. Operational effectiveness includes but is non express to efficiency. Information technology refers to many practices that allow a visitor to ameliorate use its inputs.

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

Porter states that a company can outperform rivals but if information technology tin can plant a difference it tin preserve. Information technology must deliver greater value to customers or create comparable value at a lower cost, or practise both. However, Porter argues that well-nigh companies today compete on the footing of operational effectiveness. This concept of competition based on operational effectiveness is illustrated via the productivity frontier, depicted in the figure beneath.

The productivity borderland is the sum of all existing best practices at any given fourth dimension or the maximum value that a company can create at a given cost, using the best available technologies, skills, direction techniques, and purchased inputs. Thus, when a company improves its operational effectiveness, information technology moves toward the borderland. The frontier is constantly shifting outward as new technologies and management approaches are adult and as new inputs become available. To keep up with the continuous shifts in the productivity frontier, managers accept adopted techniques similar continuous comeback, empowerment, learning organization, etc. Although companies meliorate on multiple dimensions of operation at the same time every bit they move toward the frontier, most of them fail to compete successfully on the footing of operational effectiveness over an extended menses. The reason for this being that competitors are chop-chop able to imitate best practices similar management techniques, new technologies, input improvements, etc. Thus, competition based on operational effectiveness shifts the frontier outward and effectively raises the bar for everyone. Only such competition only produces accented improvement in operational effectiveness and no relative improvement for anyone.

"Contest based on operational effectiveness alone is mutually destructive, leading to wars of compunction that can be arrested just limiting competition"(p. 64). Such competition can exist witnessed in Japanese companies, which started the global revolution in operational effectiveness in the 1970s and 1980s. Withal, now companies (including the Japanese) competing solely on operational effectiveness are facing diminishing returns, nix-sum contest, static or declining prices, and pressures on costs that compromise companies' ability to invest in the business organisation for the long term.

II. Strategy Rests on Unique Activities

"Competitive strategy is about beingness different. Information technology means deliberately choosing a different set of activities to deliver a unique mix of value" (p. 64). Moreover, the essence of strategy, co-ordinate to Porter, is choosing to perform activities differently than rivals. Strategy is the creation of a unique and valuable position, involving a dissimilar set of activities.

The Origins of Strategic Positions

Strategic positions sally from iii sources, which are not mutually exclusive and ofttimes overlap.

1. Diverseness-based positioning: Produce a subset of an industry's products or services. It is based on the selection of product or service varieties rather than customer segments. Thus, for most customers, this blazon of positioning will only come across a subset of their needs. Information technology is economically conceivably simply when a company can best produce particular products or services using distinctive sets of activities.

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

3. Access-based positioning: Segmenting customers who are attainable in unlike means. Although their needs are similar to those of other customers, the best configuration of activities to reach them is dissimilar. Admission 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 style.

Whatever the footing (diversity, needs, access, or some combination of the iii), positioning requires a tailored prepare of activities because information technology is ever a function of differences in activities (or differences on the supply side). Positioning, moreover, is not always a function of difference on the need (or customer) side. For case, variety and access positionings do non rely on whatever customer differences.

3. A Sustainable Strategic Position Requires Trade-offs

According to Porter, a sustainable reward cannot be guaranteed by merely choosing a unique position, equally competitors will imitate a valuable position in i of the two following means:

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

two. 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 there must be trade-offs with other positions. "A trade-off means that more of one thing necessitates less of another" (p. 68).

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

1. A company known for delivering i kind of value may lack brownie and confuse customers or undermine its own reputation past delivering some other kind of value or attempting to deliver ii inconsistent things at the aforementioned time.

2. Trade-offs ascend from activities themselves. Different positions crave different production configurations, different equipment, different employee behavior, different skills, and different management systems. In general, value is destroyed if an activity is over designed or under designed.

3. Trade-offs arise from limits on internal coordination and control. Past choosing to compete in one style and not the other, management is making its organizational priorities clear. In dissimilarity, companies that attempt to exist all things to all customers, often adventure confusion amongst its employees, who then attempt to brand day-to-day operating decisions without a articulate framework.

Moreover, trade-offs create the need for choice and protect against repositioners and straddlers. Thus, strategy can also be divers as making trade-offs in competing. The essence of strategy is choosing what not to exercise.

IV. Fit Drives Both Competitive Advantage and Sustainability

Positioning choices determine not simply which activities a company will perform and how information technology will configure private activities but also how activities relate to ane some other. While operational effectiveness focuses on private activities, strategy concentrates on combining activities.

"Fit locks out imitators by creating a concatenation that is equally stiff as its strongest link" (p. 70). Fit, every bit per Porter, is the cardinal component of competitive advantage considering discrete activities often affect one another.

Although fit amid 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. In that location are three types of fit, which are not mutually sectional:

one. Starting time-guild fit: Simple consistency between each activeness (function) and the overall strategy. Consistency ensures that the competitive advantages of activities cumulate and practise non 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.

2. Second-order fit: Occurs when activities are reinforcing.

three. Third-guild fit: Goes beyond activity reinforcement to what Porter refers to as optimization of effort. Coordination and information commutation beyond activities to eliminate redundancy and minimize wasted effort are the near bones types of endeavor optimization.

In all 3 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, co-ordinate to Porter, companies should think in terms of themes that pervade many activities (i.due east., low cost) instead of specifying individual strengths, cadre competencies or critical resources, as strengths cut across many functions, and one strength blends into others.

Fit and Sustainability

Strategic fit is fundamental non just to competitive advantage but likewise to the sustainability of that advantage considering it is harder for a competitor to lucifer an assortment of interlocked activities than it is merely to replicate an private activity. Thus, "positions congenital on systems of activities are far more than sustainable than those built on individual activities" (p. 73). The more a visitor'southward positioning rests on activity systems with second- and third-order fit, the more than sustainable its advantage will be. Such systems are difficult to untangle and imitate even if the competitors are able to identify the interconnections. Further, a competitor benefits very little past imitating only a few activities inside the whole organization. Thus, achieving fit is an arduous chore equally it means integrating decisions and deportment across many contained subunits.

Additionally, fit amongst activities creates pressures and incentives to better operational effectiveness, which makes imitation even harder. Fit means that poor performance in one activity will degrade the functioning in others, and so that weaknesses are exposed and more than prone to become attention. On the other mitt, improvements in i action will "pay dividends in others" (p. 74).

Strategic positions should accept a horizon of a decade or more, not of a single planning bike, as continuity promotes improvements in individual activities and the fit beyond activities, allowing an organization to build unique capabilities and skills custom-fitted to its strategy. Continuity also reinforces a company'south identity. Frequent shifts in strategy are not only costly just inevitably leads to hedged activity configurations, inconsistencies beyond functions, and organizational dissonance.

Thus, strategy can as well be divers every bit creating fit among a company'due south activities as the success of a strategy depends on doing many things well - not but a few - and integrating amid them. If in that location is no fit amongst activities, there is no distinctive strategy and fiddling sustainability.

Alternating Views of Strategy
The Implicit Strategy Model of the Past Decade	Sustainable Competitive Advantage
One ideal competitive position in the manufacture	Unique competitive position for the company
Benchmarking of all activities and achieving best do	Activities tailored to strategy
Ambitious outsourcing and partnering to gain efficiencies	Clear trade-offs and choices vis-a-vs competitors
Advantages residuum 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 market changes	Sustainability comes from the activity system, non the parts
	Operational effectiveness a given

Five. Rediscovering Strategy

Failure to Choose

According to Porter, although external changes can pose a threat to a company's strategy, a greater threat to strategy frequently comes from within the company. "A sound strategy is undermined by a misguided view of contest, by organizational failures, and, especially, past the desire to grow" (p. 75). Moreover, the fundamental problem lies in the "best-practice" mentality of the managers, who believe in making no trade-offs, endlessly pursuing operational effectiveness, and imitating competitors to grab up in the race for operational effectiveness. Thus, managers simply do not understand the need to have a strategy.

The Growth Trap

"Among all other influences, the desire to grow has possibly the about perverse event on strategy" (p. 75). Companies often grow by extending their product lines, adding new features, imitating competitors' popular services, matching processes, and making acquisitions. However, most companies start with a unique strategic position involving clear trade-offs. Nevertheless, with the passage of time and the pressures of growth, companies are led to make compromises, which were at first, well-nigh imperceptible. Thus, through a succession of incremental changes, which seemed sensible at the time, companies have compromised their fashion 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 continue to match each other until agony breaks this roughshod 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 advantage.

Profitable Growth

I approach to persevering growth and reinforcing strategy is to concentrate on deepening a strategic position rather than broadening and compromising it. A visitor can exercise so by leveraging the existing action organization by offering features or services that rivals would find impossible or costly to friction match on a stand up-alone basis. Thus, deepening a position means making the company'due south activities more distinctive, strengthening fit, and communicating strategy better to those customers who value it. Simply currently many companies attempt to grow by calculation hot features, products, or services without adapting them to their strategy.

Globalization ofttimes allows growth that is consequent with a company's strategy, as information technology opens larger markets for a focused strategy. Thus, expanding globally is more than probable to reinforce a company's unique position than broadening domestically.

The Function of Leadership

"The challenge of developing or reestablishing a articulate strategy is often primarily an organizational one and depends on leadership" (p. 77). Moreover, strong leaders, who are willing to brand choices, are essential. General management should do more than just stewardship of individual functions. They should ascertain and communicate the core company's unique position, make trade-offs, and forge fit amongst the diverse activities of the company. Further, the leader should decide which changes in the industry and customer demands, is the company going to respond to. The leader should be able to teach others in the organisation most strategy - and to say no.

Strategy is near choosing what to do as well equally what not to do. Deciding which target grouping of customers, varieties, and needs the company should serve is cardinal to developing a strategy. Strategy is also yet, in deciding not to serve other customers or needs and non to offer certain features or services. Thus, strategy requires continuous subject and clear advice. Strategy should guide employees in making choices that ascend because of trade-offs in their individual activities and in day-to-day decisions.

Moreover, managers demand to understand that operational effectiveness, although a necessary part of management, is non strategy. Managers should be able to conspicuously distinguish between the 2.

Determination

"Strategic continuity does not imply a static view of competition. A visitor must continually better its operational effectiveness and actively try to shift the productivity borderland; at the same time, there needs to be ongoing effort to extend its uniqueness while strengthening the fit among its activities" (p. 78). Notwithstanding, a company may accept to modify its strategic position due to a major structural alter in the industry. A company should choose its new position depending on its power to find new trade-offs and leverage a new arrangement of complementary activities into a sustainable advantage.

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