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What is Strategy?

by Michael E. Porter

Harvard Busin e s Review


Reprint 96608

Harvard Business Review


NOVEMBER-DECEMBE Reprint
MICHAEL E. PORTER STEPHEN S. ROACH NIRMALYA KUMAR WHAT IS STR ATEGY? THE HOLLO W RING OF THE PRODUCTIVIT Y REVI VAL THE POWE R OF TRUST IN MANU FACTURER-RE TAILE R REL ATIONSHIPS

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JAMES WALDROOP AND TIMOTHY BUTLER THE EXECUTIV E AS COACH AMAR BHIDE ROB GOFFEE AND GARETH JONES MICHAEL C. BEERS THE QUESTION S EVE RY ENTREPRENEU R MUST ANSWER WHAT HOLDS THE MODER N COM PANY TOGETHER? HBR CASE STUDY THE STR ATEG Y THAT WOULDN T TR AVEL THINKING ABOUT THE HUMAN SIDE OF MANAGEMENT SOCIAL ENTERPRISE PROFIT S FOR NONPROFITS : FIND A CORPOR ATE PARTNER PERSPECTIVES THE FUTURE OF INTERACTIV E MARKETING ADAM M. BRANDENBURGER AND BARRY J. NALEBUFF BOOKS IN REVIEW INSIDE INTEL

THOMAS TEAL

ALAN R. ANDREASEN

H B R
NOVEMBER DECEM BER 1996

I. O p e r a t io nEaffe c tiv e n eIs s o tS t r a t e g y l sN


For almos t two decades , manager s have been lea rning to play by a new set of rules. Companies mus t be flexibl e to respon d rapidl y to competitive and market changes. They must benchmark continuousl y to achieve best practice . The y must outsourc e aggressivel y to gain efegy. The quest for productivit y, qualit y, and speed has spawned a remarkable number of management tool s and techniques : tota l qualit y management, benchmarking, time-based competition, outsourcing, par tnering, reengineering , chang e management . Although the resultin g op-

W h a Is t S tra te g y ?
in the

ficiencies . An d the y mus t nur ture a few core competencies race to stay ahead of rivals.

by Michael E. Porter

erationa l improvements have often been dramatic, many companies have been frustrate d by thei r inabilit y to

Positioning once the hea rt of strategy is reject- ed as too stati c for today s dynami c market s and changing technologies. According to the new dog- ma, rivals can quickly copy any market position, and competitiv e advantag e is, at best, tempora ry. But those beliefs are dangerous half-t ruths, and

they are leading more and more companies down the pat h of mutuall y dest ructiv e competition. True, som e barrier s to competitio n are fallin g as regulation eases and markets become global. True, companies have properly invested energy in becom- ing leane r and mor e nimble . In man y industries, howeve r, wha t som e call

hypercompetitio n is a self-inflicted wound, not the inevitable outcome of a changing paradigm of competition. The root of the problem is the failure to distinguish between operational effectiveness and strat-

translate those gains into sustainable profitabilit y. And bit by bit, almost imperceptibl y, management tools have taken the place of strateg y. As managers push to improve on all fronts, they move farther away from viable competitive positions.

Operational Effectiveness: Necessa ry but Not Sufficient


Operationa l effectivenes s and strateg y are both essential to superior performance, which, after all, is the prima ry goal of any enterprise. But they work in very different ways.
Michael E. Porter is the C. Roland Christensen Professor of Busines s Administratio n at the Harva rd Business School in Boston, Massachusetts.
HARVARD BUSINESS REVIEW November-December 1996 Copyright 1996 by the President and Fellows of Harvard College. All rights rese rved.

m rivals only if it can establish a difference that it can prese rve. It must deliver greater value to cust omers or create comparable value at a lower cost, or do both. The arithy then follows: delivermpany to charge higher ing greater value allows a co efficienc y result s in averag e uni t prices ; greater between companies in lower average unit costs. Ultimatel y, all differences hundreds of activities sell, and deliver their cost or price derive from the required to create, produce, calling on customers, nd products or services, such as training employees. assembling final products, aing activities, and cost ming pa rticular activiCost is generated by perform advantage arises from perforompetitors . Similarl y, oth ties mor e efficientl y tha n c the choice of actividifferentiation arises from bmed. Activities, then, titive advantage. Overties and how they are perfor are the basic units of compe age result s from all a all advantag e or disadvant ly a few.1 company s activities, not on OE) means performing Operational effectiveness ( rivals perform them. cludes but is not limitsimilar activities better ny number of practices than Operational effectiveness in ed to ter utilize its inputs by, efficienc y. It refers to a that ts in products or develallow a company to bet for In contrast, strategic example, reducing defec ing differen t activitie s oping better products faste r. imilar activities in difpositionin g mean s perform from rivals or performing s ferent ways. Difference s in operationa l effectivenes s among companies are pervasive. Some companies are able

Operational Effectiveness Versus Strategic Positioning


high

Productivity Frontier (state of best practice)

Nonprice buyer value delivered low hig h low Relative cost position

tional effectiveness are an impo rtant source of difference s in profitabilit y amon g competitor s becaus e the y directl y affect relativ e cost positions and levels of differentiation. Differences in operational effectiveness were at the hea rt of the Japanese challenge to Weste rn companies in the 1980s. The Japanese were so far ahead of rival s in operationa l effectivenes s tha t they could offer lower cost and superior quality at t the

A companycan outperform

same time. It is wo rth dwelling on this point, because so much recent thinking about competition depends on it. Imagine for a moment a productivity frontier that constitutes the sum of all existing best practices at any given time. Think of it as the maximum valu e tha t a compan y deliverin g a

rivals only if it can establish a difference that it can preserve.


to get more out of their inputs than others because the y eliminat e waste d effo rt, emplo y mor e advanced technolog y, motivate employees bette r, or
62

particular product or service can create at a given cost, usin g the best availabl e technologies , skills , management techniques, and purchased inputs. The productivity frontier can

have greater insight into managing particular activ- ities or sets of activities. Such differences in operaHARVARD BUSINESS REVIEW November-December 1996

Thi s articl e has benefite d greatl y fro m the assistance of many individuals and companies. The author gives special thanks to Jan Rivkin, the coauthor of a related paper. Substantia l researc h contribution s hav e been made by Nicolaj Siggelko w, Dawn Sylveste r, and Lucia Marshall. Tarun Khanna, Roger Ma rtin, and Anita McGaha n hav e provide d especiall y extensiv e comments.

apply to individua l activities , to group s of linked activities such as order processing and manufacturing, and to an entire company s activities. When a company improves its operational effectiveness, it moves toward the frontie r. Doing so may require capital investment, different personnel, or simply new ways of managing. The productivit y frontie r is constantl y shifting outward as new technologies and management approaches are developed and as new inputs become available. Laptop computers, mobile communic ations , the Inte rnet , and softwar e suc h as Lotus Notes, for example, have redefined the productivity

HARVARD BUSINESS REVIEW

November-December

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WHAT IS STRATEGY?

frontier for sales-force operations and created rich possibilities for linking sales with such activities as order processing and after-sales suppo rt. Similarl y, lean production, which involves a family of activi- ties, has allowe d substantia l imp rovement s in manufacturin g productivit y and asse t utilization. For at least the past decade, managers have been preoccupied with improving operational effectiveness. Through programs such as TQM, time-based competition , and benchmarking , the y have changed how they perform activities in order to eliminate inefficiencies, improve customer satisfaction, and achiev e best practice . Hopin g to keep up with shifts in the productivity frontie r, managers have embrace d continuou s improvement , empowe rment, chang e management , and the socalle d lea rning organization . The popularit y of outsourcin g and the virtual corporation reflect the growing recogni- tion that it is difficult to perform all activities as productively as specialists. As companie s mov e to the frontie r, the y can often improve on multiple dimensions of performance at the sam e time . For example , manufactu rers that adopted the Japanese practice of rapid changeovers in the 1980s were able to lower cost and improve differentiation simultaneousl y. What were once be- lieve d to be real trade-off s betwee n defect s and costs, for example turned out to be illusions cre- ated by poor operationa l effectiveness . Managers have lea rned to reject such false trade-offs.

Constant improvement in operational effectiveness is necessa ry to achieve superior profitabilit y. Howeve r, it is not usually sufficient. Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day. The most obvious reason for that is the rapid diffusion of best practices. Competitors can quickly imitate management techniques, new technologies, input improvements, and superior ways of meeting cus- tomers needs. The most generic solutions those that can be used in multiple settings diffuse the fastest. Witness the proliferation of OE techniques accelerated by suppo rt from consultants. OE competition shifts the productivity frontier outward , effectivel y raisin g the bar for eve ryone. But although such competition produces absolute improvement in operational effectiveness, it leads to relative improvement for no one. Consider the $5 billion-plus U.S. commercial-printing indust ry. The major players R.R. Donnelley & Sons Company, Quebeco r, World Color Press, and Big Flower Press are competing head to head, serving all types of customers , offerin g the sam e array of printing technologie s (gravur e and web offset), investing heavily in the same new equipment, running their presses faste r, and reducing crew sizes. But the re- sulting major productivity gains are being captured by customer s and equipmen t suppliers , not re- taine d in superio r profitabilit y. Even indust ry-

Japanese Companies Rarely Have Strategies


The Japanese triggered a global revolution in operational effectiveness in the 1970s and 1980s, pioneering practices such as total quality management and continuous improvement. As a result, Japanese manufacturers enjoyed substantial cost and quality advantages for many years. But Japanes e companie s rarely develope d distinct strategic positions of the kind discussed in this article. Those that did Sony, Canon, and Sega, for example were the exception rather than the rule. Most Japanese companies imitate and emulate one anothe r. All rivals offer most if not all product varieties, features, and ser- vices; they employ all channels and match one anothers plant configurations. The dangers of Japanese-style competition are now becoming easier to recognize. In the 1980s, with rivals operating far from the productivity frontie r, it seemed possible to win on both cost and quality indefinitel y. Japanes e companie s were all able to grow in an ex- panding domestic economy and by penetrating global

WHAT IS STRATEGY? markets. They appeared unstoppable. But as the gap in operationa l effectivenes s narrows , Japanes e compa- nies are increasingl y caugh t in a trap of thei r own making. If they are to escape the mutually dest ructive battle s now ravagin g thei r pe rformance , Japanese companies will have to lea rn strateg y. To do so, they may have to overcome strong cultural barriers. Japan is notoriously consensus oriented, and companies have a strong tendency to mediate differ- ences among individuals rather than accentuate them. Strateg y, on the other hand, requires hard choices. The Japanese also have a deeply ingrained service tradition that predisposes them to go to great lengths to satisfy any need a customer expresses. Companies that com- pete in that way end up blu rring their distinct posi- tioning, becoming all things to all customers. This discussion of Japan is drawn from the author s researc h wit h Hirotak a Takeuchi , wit h help from Mariko Sakakibara.

leade r Donnelley s profi t margin , consistently higher than 7% in the 1980s, fell to less than 4.6% in 1995. This patte rn is playing itself out in industry after indust ry. Even the Japanese , pioneer s of the new competition, suffer from persistently low profits. (See the inse rt Japanese Companies Rarely Have Strategies.) The secon d reaso n tha t improve d operational effectivenes s is insufficien t competitiv e convergence is mor e subtl e and insidious . The mo re benchmarking companies do, the more they look alike. The more that rivals outsource activities to efficien t thi rd pa rties , ofte n the sam e ones, the more generic those activities become. As rivals im- itate one anothe rs improvements in qualit y, cycle times, or supplier partnerships, strategies converge and competitio n become s a serie s of races down identical paths that no one can win. Competition based on operational effectiveness alone is mut u-

ally dest ructive , leadin g to wars of attritio n that can be arrested only by limiting competition. The recen t wave of indust r y consolidatio n through mergers makes sense in the context of OE competition. Driven by performance pressures but lackin g strategi c vision , compan y after company has had no better idea than to buy up its rivals. The competitors left standing are often those that outlasted others, not companies with real advantage. After a decade of impressive gains in operational effectiveness , man y companie s are facing diminishing retu rns. Continuous improvement has been etched on managers brains. But its tools unwitting- ly draw companie s towa rd imitatio n and hom o- geneit y. Graduall y, managers have let operational effectiveness supplant strateg y. The result is zero- sum competition , stati c or declinin g prices , and pressure s on cost s tha t compromis e companies ability to invest in the business for the long term.

II.S t r a t e g ye s ts n U n iq u e c tiv itie s R o A


Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value. Southwest Airlines Compan y, for example, offers sho rt-haul , low-cost , point-to-poin t servic e between midsize cities and seconda ry airpo rts in large cities . Southwes t avoid s large airpo rts and does not fly great distances. Its customers include busi- ness travelers, families, and students. Southwest s frequen t depa rture s and low fares attrac t price- sensitive customers who othe rwise would travel by bus or car, and convenienceoriented travelers who would choose a full-se rvice airline on other routes. Most managers describe strategic positioning in terms of thei r customers : Southwes t Airlines serves price- and convenience-sensitive travelers, A full-se rvice airline is configured to get passengers from almos t any poin t A to any poin t B. To reach a large number of destinations and serve passenger s wit h connectin g flights , full-se rvic e airlines employ a hub-and-spoke system centered on majo r airpo rts. To attrac t passenger s who desi re mor e comfo rt, the y offer first-clas s or businessclass service . To accommodat e passenger s who must change planes, they coordinate schedules and check and transfer baggage. Because some passen- gers will be traveling for many hours, fullservice airlines serve meals. Southwest , in contrast , tailor s all its activities to deliver low-cost, convenient service on its particula r type of route . Throug h fast tu rnarounds at the gate of only 15 minutes, Southwest is able to keep plane s flying longe r hours partures with fewer aircraft. South-

The essence of strategyis choosingto perform

activities

differentlythan rivals do.


for example. But the essence of strategy is in the activities choosing to perform activities differently or to perform different activities than rivals. Other- wise, a strategy is nothing more than a marketing slogan that will not withstand competition.

seats, interline baggage checking, or mated ticketing at the gate encourages customer s to bypas s trave l agents, allowing Southwest to avoid their commissions. A standardized fleet of 737 aircraft boosts the efficiency of maintenance. Southwest has staked out a unique and valuable strategic position based on a tailored set of activities. On the route s serve d by Southwest , a full-

WHAT IS STRATEGY?

service airline could never be as convenient or as low cost. Ikea, the global furniture retailer based in Sweden, also has a clear strategic positioning. Ikea targets young furniture buyers who want style at low cost. What turns this marketing concept into a stra- tegic positioning is the tailored set of activities that make it work. Like Southwest, Ikea has chosen to perform activities differently from its rivals. Consider the typical furniture store. Showrooms displa y sample s of the me rchandise . One area migh t contai n 25 sofas; anothe r will displa y five dining tables. But those items represent only a frac- tion of the choices available to customers. Dozens of books displaying fabric swatches or wood sam- ples or alte rnate styles offer customers thousands of product varieties to choose from. Salespeople of- ten esco rt customers through the store, answering questions and helping them navigate this maze of choices . Onc e a custome r make s a selection , the order is relayed to a thirdparty manufacture r. With luck , the furnitur e will be delivere d to the cus- tome rs hom e withi n six to eigh t weeks . Thi s is a valu e chai n tha t maximize s customizatio n and service but does so at high cost. In contrast , Ikea ser ves customer s who ar e happy to trade off service for cost. Instead of having a sales associate trail customers around the store,

Ikea uses a self-se rvic e mode l based on clear, instor e displays . Rathe r tha n rely solel y on thirdparty manufacturers, Ikea designs its own low-cost, modula r, ready-to-assemble furniture to fit its positioning. In huge stores, Ikea displays every product it sells in room-lik e settings , so customer s don t need a decorator to help them imagine how to put the piece s togethe r. Adjacen t to the fur nished showrooms is a warehouse section with the products in boxes on pallets. Customers are expected to do thei r own picku p and delive ry, and Ikea will even sell you a roof rack for your car that you can retu rn for a refund on your next visit. Althoug h muc h of its low-cos t positio n comes from having customers do it themselves, Ikea offers a number of extra services that its competitors do not. In-store child care is one. Extended hours are anothe r. Thos e service s are uniquel y aligned with the needs of its customers, who are young, not wealth y, likel y to have childre n (but no nanny), and, becaus e the y wor k for a living , have a need to shop at odd hours.

The Origins Positions

of

Strategic

Strategi c position s emerg e from thre e distinct sources , whic h are not mutuall y exclusiv e and ofte n overlap . First, positionin g can be based on

Finding New Positions: The Entrepreneurial Edge


Strategi c competitio n can be though t of as the proces s of perceivin g new position s tha t woo customers from established positions or draw new customers into the market. For example, superstores offering dept h of merchandis e in a singl e product catego ry tak e marke t shar e from broad-lin e depa rtment stores offering a more limited selection in many categories. Mail-order catalogs pick off customers who crave convenience. In principle, incumbents and entrepreneurs face the same challenges in finding new strategi c positions . In practice , new entrant s often have the edge. Strategi c positioning s are ofte n not obvious , and finding them requires creativity and insight. New entrants often discover unique positions that have been available but simply overlooked by established competitors . Ikea, for example , recognize d a customer group that had been ignored or served poorl y. Circuit City Stores ent ry into used cars, CarMax, is based on a new way of performing activities extensive refurbishing of cars, product guarantees, no-haggle pricing,

sophisticate d use of in-hous e custome r financin g that has long been open to incumbents. New entrants can prosper by occupying a position tha t a competito r once held but has ceded through years of imitation and straddling. And entrants coming from other industries can create new positions because of distinctive activities drawn from their other businesses . CarMa x bo rrow s heavil y from Circuit City s expe rtise in invento ry management, credit, and other activities in consumer electronics retailing. Most commonl y, howeve r, new positions open up because of change. New customer groups or purchase occasions arise; new needs emerge as societies evolve; new distribution channels appear; new technologies are developed; new machine ry or info rmation systems becom e available . Whe n suc h change s happen , new entrants, unencumbered by a long histo ry in the indust ry, can often more easily perceive the potential for a new way of competing . Unlik e incumbents , new- comer s can be mo re flexibl e becaus e the y face no trade-offs with their existing activities.

producing a subset of an indust rys products or services. I call this variety-based positioning because it is based on the choice of product or service varieties rather than customer segments. Varietybased positionin g make s economi c sens e whe n a com- pany can best produc e particula r product s or ser- vices using distinctive sets of activities. Jiffy Lube Inte rnational, for instance, specializes in automotive lubricants and does not offer other

tomers. I call this needs-based positionin g, which comes closer to traditional thinking about targeting a segmen t of customers . It arise s whe n the re are groups of customers with differing needs, and when a tailore d set of activitie s can serve thos e needs best. Some groups of customers are more price sensitiv e tha n others , deman d differen t produc t features , and need varyin g amount s of info rmation, suppo rt, and services. Ikeas customers are a good example of such a group. Ikea seeks need s of its targe t customers , not A variant of needs-based positionhas different needs on different occations. The same person, for example, may have different needs when traveling on business than when travel-

Strategicpositionscan be based on customers needs, customers accessibilit or the variety y, of a company productsor s services.
car repair or maintenance services. Its value chain produces faster service at a lower cost than broader line repair shops, a combination so attractive that many customers subdivide their purchases, buying oil changes from the focused competito r, Jiffy Lube, and going to rivals for other services. The Vanguard Group, a leader in the mutual fund indust ry, is another example of variety-based positioning . Vanguar d provide s an array of common stock, bond, and money market funds that offer pre- dictabl e performanc e and rock-botto m expenses. The company s investmen t approac h deliberately sacrifice s the possibilit y of extrao rdina ry perfor- manc e in any one year for good relativ e perfor- mance in every year. Vanguard is known, for exam- ple, for its inde x funds . It avoid s makin g bets on interes t rate s and steer s clear of na rro w stock groups . Fund manager s keep tradin g level s low, which holds expenses down; in addition, the com- pany discourages customers from rapid buying and sellin g becaus e doing so drive s up cost s and can force a fund manager to trade in order to deploy new capita l and raise cash for redemptions . Vanguard also takes a consistent low-cost approach to manag- ing distribution, customer service, and marketing. Man y investor s includ e one or mor e Vanguard funds in their portfolio, while buying aggressively managed or specialized funds from competitors. The people who use Vanguard or Jiffy Lube are re-

sponding to a superior value chain for a particular type of service . A variety-base d positionin g can serve a wide array of customers, but for most it will meet only a subset of their needs. A second basis for positioning is that of serving most or all the needs of a particular group of cus-

ing for pleasu re with the famil y. Buyers of cans beverage companies, for example will likely have differen t need s from thei r prima ry supplie r than from their seconda ry source. It is intuitive for most managers to conceive of thei r busines s in terms of the customers needs they are meeting. But a critical element of needsbased positioning is not at all intuitive and is often overlooked. Differences in needs will not translate int o meaningfu l position s unles s the best set of activities to satisfy them also differs. If that were not the case, every competito r coul d mee t those same needs, and there would be nothing unique or valuable about the positioning. In private banking, for example, Bessemer Trust Compan y target s familie s wit h a minimu m of $5 millio n in investabl e asset s who wan t capital prese rvation combined with wealth accumulation. By assigning one sophisticated account officer for every 14 families, Bessemer has configured its activities for personalized service. Meetings, for example, are more likely to be held at a client s ranch or yacht than in the office. Bessemer offers a wide array of customized services, including investment management and estate administration, oversight of oil and gas investments, and accounting for racehorses and aircraft. Loans, a staple of most private banks, are rarely needed by Besseme rs clients and make up a tiny fraction of its client balances and income. Despite the most generous compensation of account officers and the highest personnel cost as a percentage of operating expenses, Besseme rs differentiation with its target families produces a retu rn on equity estimated to be the highest of any private banking competito r.

WHAT IS STRATEGY? T

Citibank s privat e bank , on the othe r hand, ser ves client s wit h minimu m asset s of about $250,00 0 who, in contras t to Besseme rs clients, want convenient access to loans from jumbo mo rt- gages to deal financing . Citibank s accoun t ma n- agers are primarily lenders. When clients need oth- er services, their account manager refers them to other Citibank specialists, each of whom handles prepackage d products . Citibank s syste m is less customized than Besseme rs and allows it to have a lower manager-to-client ratio of 1:125. Biannual of- fice meetings are offered only for the largest clients. Both Bessemer and Citibank have tailored their ac- tivities to meet the needs of a different group of pri- vate banking customers. The same value chain can- not profitably meet the needs of both groups. The thir d basis for positionin g is tha t of segmenting customers who are accessible in different ways. Although their needs are similar to those of othe r customers , the best configuratio n of activities to reac h the m is different . I call thi s accessbased positioning. Access can be a function of customer geography or customer scale or of anything tha t require s a differen t set of activitie s to reach customers in the best way. Segmentin g by acces s is less commo n and less well understood than the other two bases. Ca rmike Cinemas, for example, operates movie theaters exclusively in cities and towns with populations under 200,000 . How does Ca rmik e mak e mone y in markets that are not only small but also won t support big-city ticket prices? It does so through a set of activitie s tha t resul t in a lean cost st ructure. Ca rmike s small-tow n customer s can be served through standardized, low-cost theater complexes requiring fewer screens and less sophisticated pro-

jection technology than big-city theaters. The companys proprieta ry info rmation system and management process eliminate the need for local administrativ e staff beyon d a singl e theate r manage r. Ca rmik e also reaps advantage s from centralized purchasing, lower rent and payroll costs (because of its locations), and rock-bottom corporate overhead of 2% (the indust ry averag e is 5%). Operatin g in smal l communitie s also allow s Ca rmik e to pra c- tice a highly personal form of marketing in which the theater manager knows patrons and promotes attendance through personal contacts. By being the dominant if not the only theater in its markets the main competition is often the high school football team Ca rmike is also able to get its pick of films and negotiate better terms with distributors. Rural versus urban-based customers are one exampl e of acces s drivin g difference s in activities. Serving small rather than large customers or densely rather than sparsely situated customers are other examples in which the best way to configure marketing , order processing , logistics , and afte r-sale service activities to meet the similar needs of distinct groups will often diffe r. Positioning is not only about carving out a niche. A position emerging from any of the sources can be broad or na rrow. A focuse d competito r, suc h as Ikea, target s the specia l need s of a subse t of customer s and design s its activitie s accordingl y. Focuse d competitor s thriv e on group s of customers who are overse rved (and hence overpriced) by more broadly targeted competitors, or underse rved (and hence underpriced). A broadly targeted competitor for example, Vanguard or Delta Air Lines serves a wide array of customers, performing a set of ac- tivitie s designe d to mee t thei r commo n needs . It

The Connection with Generic Strategies


In Competitiv e Strateg y (The Free Press, 1985), I introduce d the concep t of generi c strategie s cost leadership , differentiation , and focus to represent the alte rnative strategic positions in an indust ry. The generic strategies remain useful to characteriz e strategi c position s at the simplest and broadest level. Vanguard, for instance, is an example of a cost leadership strategy, whereas Ikea, with its narrow customer group, is an example of cost-based focus. Neutrogen a is a focuse d differentiato r. The bases for positioning varieties, needs, and access carry the understandin g of thos e generi c strategie s to a greate r level of specificit y. Ikea and Southwes t are both cost-based focusers, for example, but Ikeas focus is based on the needs of a customer group, and Southwest s is based on offerin g a particular service variet y. The generi c strategie s framewor k int roduced the need to choose in order to avoid becoming caught between what I then described as the inheren t contradiction s of different strategies . Trade-off s betwee n the activities of incompatible positions explain those contradictions. Witness Continental Lite, which tried and failed to compete in two ways at once.

ignores or meets only partially the mo re idiosyncratic needs of particular customer groups. Whateve r the basis variet y, needs , access , or som e combinatio n of the thre e positionin g require s a tailo red set of activitie s becaus e it is always a function of differences on the supply side; that is, of differences in activities. Howeve r, positioning is not always a function of differences on the demand, or custome r, side. Variety and access positionings, in particula r, do not rely on any customer differences. In practice, howeve r, variety or acces s difference s ofte n accompan y need s differences. The tastes that is, the needs of Ca rmike s small-town customers, for instance, run more to- ward comedies, Weste rns, action films, and family

ente rtainment . Ca rmik e does not run any films rated NC-17. Having defined positioning, we can now begin to answer the question, What is strategy? Strategy is the creation of a unique and valuable position, in- volvin g a differen t set of activities . If ther e were only one ideal position , the re woul d be no need for strateg y. Companies would face a simple imper- ative win the race to discover and preempt it. The essenc e of strategi c positionin g is to choos e ac- tivities that are different from rivals . If the same set of activities were best to produce all varieties, mee t all needs , and acces s all customers , companies could easily shift among them and operational ef- fectiveness would dete rmine performance.

I II .A S u s ta in a bSlera te g P o s it ioR e q u ir eTra d e -o ffs t ic n s


Choosin g a uniqu e position , howeve r, is not enoug h to guarante e a sustainabl e advantage . A valuable position will attract imitation by incumbents, who are likely to copy it in one of two ways. First, a competitor can reposition itself to match the superio r performe r. J.C. Penne y, for instance, has been repositioning itself from a Sears clone to a more upscale, fashion-oriented, soft-goods retaile r. A second and far more common type of imitation is straddling. The straddler seeks to match the benefits of a successful position while maintaining its existing position. It grafts new features, services, or technologies onto the activities it already performs. For those who argue that competitors can copy any market position, the airline indust ry is a perfect test case. It would seem that nearly any competitor could imitate any other airline s activities. Any airlin e can buy the sam e planes , lease the gates, and match the menus and ticketing and baggage handling services offered by other airlines. Continenta l Airline s saw how well Southwest was doing and decide d to straddle . Whil e maintaining its position as a full-se rvice airline, Continental also set out to match Southwest on a number of point-to-poin t routes . The airlin e dubbed the new servic e Continenta l Lite. It eliminated meal s and first-clas s service , increase d depa rture frequenc y, lowered fares, and sho rtened turnaround tim e at the gate. Becaus e Continenta l remained a full-se rvice airline on other routes, it continued to use travel agents and its mixed fleet of planes and to provide baggage checking and seat assignments. But a strategic position is not sustainable unless there are trade-offs with other positions. Trade-offs

occu r whe n activitie s are incompatible . Simply put, a trade-off means that more of one thing necessitate s less of anothe r. An airlin e can choos e to serve meals adding cost and slowing turnaround time at the gate or it can choose not to, but it can- not do both without bearing major ine fficiencies. Trade-offs create the need for choice and protect against repositioners and straddlers. Consider Neutrogen a soap. Neutrogen a Corporation s varietybased positioning is built on a kind to the skin, residue-free soap formulated for pH balance. With a large detail force calling on dermatologists, Neutrogena s marketing strategy looks more like a drug company s tha n a soap make rs. It adve rtise s in medical jou rnals, sends direct mail to doctors, attends medical conferences, and performs research at its own Skincare Institute. To reinforce its positioning, Neutrogena originally focused its distributio n on drugstore s and avoide d price promotions. Neutrogena uses a slow, more expensive manufacturing process to mold its fragile soap. In choosing this position, Neutrogena said no to the deodorants and skin softeners that many customer s desir e in thei r soap. It gave up the largevolume potential of selling through supe rmarkets and using price promotions. It sacrificed manufacturing efficiencies to achieve the soaps desired attributes . In its origina l positioning , Neut rogena made a whole raft of trade-offs like those, trade-offs that protected the company from imitators. Trade-offs arise for three reasons. The first is inconsistencie s in imag e or reputation . A company known for delivering one kind of value may lack credibility and confuse customers or even under-

mine its reputation if it delivers another kind of valu e or attempt s to delive r two inconsistent things at the same time. For example, Ivory soap, with its position as a basic, inexpensive eve ryday soap would have a hard time reshaping its image to matc h Neutrogena s premiu m medical reputation . Efforts to creat e a new imag e typicall y cost ten s or even hundred s of million s of dollar s in a major indust ry a powe rful barrier to imitation. Second , and mo re impo rtant , trade-o ffs arise from activitie s themselves . Di fferen t positions (wit h thei r tailore d activities ) requir e different product configurations, different equipment, different employe e behavio r, differen t skills , and differen t managemen t systems . Man y trade-off s reflect inflexibilitie s in machine ry, people , or systems. The mor e Ikea has configure d its activitie s to lower costs by having its customers do their own assembly and delive ry, the less able it is to satisfy customers who require higher levels of service. Howeve r, trade-off s can be even mor e basic. In general, value is destroyed if an activity is overdesigne d or unde rdesigne d for its use. For example, even if a given salesperson were capable of providing a high level of assistance to one customer and none to anothe r, the salesperson s talent (and some of his or her cost) would be wasted on the second custome r. Moreove r, productivit y can imp rove when variation of an activity is limited. By providing a high level of assistance all the time, the salesperso n and the enti re sales activit y can often achieve efficiencies of lea rning and scale. Finall y, trade-off s arise from limit s on inte rnal coordinatio n and control . By clearl y choosin g to compete in one way and not anothe r, tiona l prioritie s clear. Companies

generated a thousand complaints a day. Continental Lite could not afford to compete on price and stil l pay standar d travel-agen t commissions , but neithe r coul d it do withou t agent s for its fullservice business. The airline compromised by cutting commissions for all Continental flights across the board. Similarl y, it could not afford to offer the same frequent-flier benefits to travelers paying the much lower ticket prices for Lite service. It com- promised again by lowering the rewards of Conti- nental s entire frequent-flier program. The results: angry travel agents and full-se rvice customers. Continenta l trie d to compet e in two ways at once. In trying to be low cost on some routes and full servic e on others , Continenta l paid an enormous straddling penalt y. If there were no trade-offs between the two positions, Continental could have succeeded. But the absence of trade-offs is a dangerous half-t ruth that managers must unlea rn. Quality is not alway s free. Southwest s convenience , one kind of high qualit y, happens to be consistent with low costs because its frequent depa rtures are facilitated by a number of low-cost practices fast gate turnarounds and automated ticketing, for example. Howeve r, other dimensions of airline quality an assigned seat, a meal, or baggage transfer require costs to provide. In general, false trade-offs between cost and quality occu r primaril y whe n the re is redundan t or wasted effo rt, poor control or accurac y, or weak coordination. Simultaneous improvement of cost and differentiation is possible only when a company begins far behin d the productivit y frontie r or when the frontier shifts outward. At the frontie r, where

tomers, in contrast, risk confusion in to mak e day-to-da y operatin g dec iPositionin g trade-o ffs are pervasive in competition and essential to strateg y. The y creat e the need for

Trade-offs are essential to strateg They create the y. need for choice and purposefullylim it w hat a companyoffers.
degrade the value of their existing activities. Trade-offs ultimately grounded Continental Lite. The airline lost hundreds of millions of dollars, and the CEO lost his job. Its planes were

choice and purposefully limit what a company offers. They deter straddling or repositioning, because competitors that engage in those approaches under- mine their strategies and

delayed leav- ing congested hub cities or slowed at the gate by baggage transfers . Late flight s and cancellations

companies have achieved current best practice, the trade-of f betwee n cost and differentiatio n is very real indeed. After a decad e of enjoyin g productivit y advantages, Hond a Moto r Compan y and Toyot a Motor Corporation recently bumped up against the frontie r. In 1995, faced with increasing customer resistanc e to highe r automobil e prices , Hond a found that the only way to produce a less-expensive car was to skim p on featu res. In the Unite d States,

it replaced the rear disk brakes on the Civic with lower-cost drum brakes and used cheaper fabric for the back seat, hoping customers would not notice. Toyota tried to sell a version of its best-selling Corolla in Japan with unpainted bumpers and cheaper seats. In Toyota s case, customers rebelled, and the company quickly dropped the new model. For the past decade, as managers have improved operationa l effectivenes s greatl y, the y have internalized the idea that eliminating trade-offs is a good thing. But if there are no trade-offs companies will

neve r achiev e a sustainabl e advantage . The y will have to run faster and faster just to stay in place. As we retu rn to the question, What is strategy? we see that trade-offs add a new dimension to the answe r. Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do. Withou t trade-offs , ther e woul d be no need for choice and thus no need for strateg y. Any good idea could and would be quickly imitated. Again, perfor- mance would once again depend wholly on opera- tional effectiveness.

IV. F itD r iv e B o t h o m p e t it iv d v a n t a g e d s C Ae an S u s ta in a b ilit y


Positionin g choice s dete rmin e not only which activitie s a compan y will perfor m and how it will configur e individua l activitie s but also how activities relate to one anothe r. While operational effectiveness is about achieving excellence in individua l activities , or functions , strateg y is about combining activities. Southwest s rapid gate turnaround, which allows frequen t depa rture s and greate r use of aircraft , is essentia l to its high-convenience , low-cos t positioning. But how does Southwest achieve it? Part of the answer lies in the company s well-paid gate and groun d crews , whos e productivit y in turnarounds is enhanced by flexible union rules. But the bigger par t of the answe r lies in how South west performs other activities. With no meals, no seat assignment , and no interlin e baggage transfers, Southwest avoids having to perform activities tha t slow dow n othe r airlines . It select s airpo rts and route s to avoid congestio n tha t introduces delays . Southwest s stric t limit s on the type and length of routes make standardized aircraft possible: every aircraft Southwest turns is a Boeing 737. Wha t is Southwest s core competence ? Its key success factors? The correct answer is that eve ry- thin g matters . Southwest s strateg y involve s a whole system of activities, not a collection of parts. Its competitive advantage comes from the way its activities fit and reinforce one anothe r.

Fit locks out im itators by creating a chain that is as strong as its strongestlink.

Fit locks out imitators by creating a chain that is as strong as its strongest link. As in most compa- nies wit h good strategies , Southwest s activities complement one another in ways that create real economic value. One activity s cost, for example, is lowered because of the way other activities are performed. Similarl y, one activity s value to customers can be enhance d by a company s othe r activities. Tha t is the way strategi c fit create s competitive advantage and superior profitabilit y.

Types of Fit
The impo rtance of fit among functional policies is one of the oldes t ideas in strateg y. Graduall y, howeve r, it has been supplante d on the management agenda. Rather than seeing the company as a whole, managers have turned to core competencies, critical resources, and key success factors. In fact, fit is a far more central component of competitive advantage than most realize. Fit is impo rtant because discrete activities often affect one anothe r. A sophisticated sales force, for example , confer s a greate r advanembodie s premiu m technolog y and

custome r assistanc e and suppo rt. of mode l variet y is mor e valuable whe n combine d wit h an invento ry and order processin g syste m that minimize s the need for stockin g finishe d goods, a sales proces s equippe d to explai n and encour- age customization, and an adve rtising theme that stresse s the benefit s of produc t variation s that meet a custome rs special needs. Such complementaritie s are pervasiv e in strateg y. Althoug h some

fit among activities is generic and applies to many companies , the mos t valuabl e fit is strategy-specific becaus e it enhance s a position s uniqueness and amplifies trade-offs .2 There are three types of fit, although they are not mutually exclusive. First-order fit is simple consis- tenc y betwee n each activit y (function ) and the overall strateg y. Vanguard, for example, aligns all activities with its low-cost strateg y. It minimizes portfolio tu rnover and does not need highly com- pensate d mone y managers . The compan y di s- tributes its funds directl y, avoiding commissions to brokers. It also limits adve rtising, relying instead on public relations and word-of-mouth recommen- dations . Vanguar d ties its employees bonuse s to cost savings. Consistency ensures that the competitive advan- tages of activities cumulate and do not erode or can- cel themselves out. It makes the strategy easier to communicate to customers, employees, and shareholders , and imp rove s implementatio n th rough single-mindedness in the corporation.

Second-orde r fit occur s whe n activitie s are reinforcing . Neutrogena , for example , market s to upscale hotels eager to offer their guests a soap recommende d by dermatologists . Hotel s gran t Neutrogena the privilege of using its customa ry packaging whil e requirin g othe r soaps to featu re the hotel s name. Once guests have tried Neutrogena in a luxu ry hotel, they are more likely to purchase it at the drugstor e or ask thei r docto r abou t it. Thus Neutrogena s medical and hotel marketing activi- ties reinforce one anothe r, lowering total market- ing costs. In another example, Bic Corporation sells a narrow line of standa rd, low-priced pens to virtually all majo r custome r market s (retail , commercial, promotional , and giveaway ) throug h virtuall y all available channels. As with any variety-based positionin g servin g a broad group of customers , Bic emphasize s a commo n need (low price for an acceptable pen) and uses marketing approaches with a broad reach (a large sales force and heavy television adve rtising). Bic gains the benefits of consis-

Mapping Activity Systems


Activity-systemmaps, such as this one for Ikea, show how a companys strategic position is contained in a set of tailored activities designed to deliver it. In companies with a clear strategic position, a numberof higher-order strategic themes(in dark purple) can be identified and implemented through clustersof tightly linkedactivities (in light purple).

Explanator y catalogues, informative displays and labels

Selftransportby custom ers

Suburban locations with ample parking

High-traffic store layout

More impuls e buying

Limited custome r service

Selfselection by customers

Ease of transport and assembly

a s e W id e v ar ie ty w it h e o f m a n u f a c t

ur in g Self-assembly by customers

Knockdown kit packaging

Modular furniture design

Limitedsales staffing Ampl e inve ntor y on site

M o s t i t e m s i n

Increased likelihood of futurepurchase

In -hou se design focused on cost of manufacturing Low manufact uring cost

i n v e n t o r y

Y e a r r o u n d s t o c k i n g

10 0% sou rci ng fro m lon gter m su ppl ier s

WHAT IS STRATEGY? T

Vanguards Activity System


Activity-system maps can be usefulfor examining and strengtheningstrategic fit. A set of basic questions should guide the process. First, is each activity consistentwith the overall positioning the varieties produced, the needs served, and the type of customers accessed? Ask those responsiblefor each activity to identify how other activities within the company improve or detract from their performance. Second, are there ways to strengthenhow activities and groups of activities reinforce one another Finally, could ? changes in one activity elim inatethe need to perform others?

Wary of small growth funds

A broad array of mutual funds excluding some fund categories

Limited internationa l funds due to volatility and high costs

Use of redemptio n fees to discourag e trading

Employe e bonuses tied to cost savings No

expenses passed on to client

No-loads

In -house manageme nt for standard funds

Efficient investment management approach offering good, consistent performance

Emphasis on bonds and equity index funds

Strict cost contro l

Very low rate of trading Long-term

brokerdealer relationship s

No marketing changes

No commission s to brokers or distributors Direct distributio n

No firstclass travel for executives Limited advertisin g budget

investme nt encourage d

Shareholde r educatio n cautionin g about risk

Straightforward client communication and education Vanguard actively spreads its philosoph y

On-line informatio n acces s

Only three retail locations

Relianc e on word of m outh

tency across nearly all activities, including product desig n tha t emphasize s ease of manufacturing, plants configured for low cost, aggressive purchasing to minimize material costs, and in-house parts production whenever the economics dictate. Yet Bic goes beyond simple consistency because its activities are reinforcing. For example, the company uses point-of-sale displays and frequent pack-

value of

The

competitive

activit y, heavy television adve rtising, and packaging change s yield s far mor e impuls e buyin g than any activity in isolation could. Third-orde r fit goes beyon d activit y reinforcement to what I call optimization of effo rt. The Gap, a retailer of casual clothes, considers product

avail- ability in its stores a critical element of its strateg y. The Gap coul d keep product s eithe r by holding stor e invento r y or by restocking mize d its effort acros s thes e activisic clothing almost daily out of three need to carry large in-store inventories. The emphasis is on restocking becaus e the Gaps merchandising strategy sticks to basic items in relatively few colors. Whil e comparabl e retailer s achiev e turns of three to four times per year, the Gap turns its inven- tory seven and a half times per year. Rapid restock- ing, moreove r, reduce s the cost of implementing

individualactivities cannot be separated from the whole.


aging changes to stimulate impulse buying. To han- dle point-of-sal e tasks , a compan y need s a large sales force. Bics is the largest in its indust ry, and it handles point-of-sale activities better than its ri- vals do. Moreove r, the combination of point-of-sale

the Gaps sho rt model cycle, which is six to eight weeks long .3 Coordinatio n and info rmatio n exchang e across activitie s to eliminat e redundanc y and minimize wasted effort are the most basic types of effort optimization. But there are higher levels as well. Product design choices, for example, can eliminate the need for after-sal e servic e or mak e it possibl e for customer s to perfor m se rvic e activitie s themselves . Similarl y, coordinatio n wit h supplier s or distributio n channel s can eliminat e the need for some in-house activities, such as end-user training. In all three types of fit, the whole matters more tha n any individua l part. Competitiv e advantage grows out of the entire system of activities. The fit among activities substantially reduces cost or increases differentiation. Beyond that, the compet itive value of individual activities or the associated skills , competencies , or resource s canno t be de- coupled from the system or the strateg y. Thus in competitive companies it can be misleading to ex- plai n succes s by specifyin g individua l st rengths,

core competencies, or critical resources. The list of strength s cut s acros s man y functions , and one strengt h blend s int o others . It is mo re usefu l to think in terms of themes that pervade many activi- ties, suc h as low cost, a particula r notio n of cus- tomer service, or a particular conception of the val- ue delivered. These themes are embodied in nests of tightly linked 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 technolog y, or replicate a set of product features. Positions built on systems of activitie s are far mor e sustainabl e tha n those built on individual activities. Conside r thi s simpl e exercise . The probability tha t competitor s can matc h any activit y is often

Southwest Airlines Activity System

No meals

Limited passenge r service

No baggage transfers No connection s with other airlines

No seat assignments

Frequent, reliable departure s

15-m inute gate turnaround s

Limited use of travel agents

Standardize d fleet of 737 aircraft

High compensatio n of employees

Lean, highly productiv e gate crews

Automati c ticketing machines

Very low ticket prices

Short-haul, point-to-point routes between midsize cities and secondary airports

Flexible union contract s

High level of employee stock ownership

High aircraft utilizatio n

Southwes t, the lowfare airline

less than one. The probabilities then quickly compound to make matching the entire system highly unlikely (.93.9= .81; .93.93.93.9= .66, and so on). Existing companies that try to reposition or straddle will be forced to reconfigur e man y activities.

Strategicpositionsshould have a horizonof a decade or more, not of a single planning cycle.


And even new entrants , thoug h the y do not confron t the trade-off s facing establishe d rivals , still face formidable barriers to imitation. The more a company s positioning rests on activ- ity system s wit h second - and thi rd-orde r fit, the more sustainable its advantage will be. Such sys- tems, by their very nature, are usually difficult to untangle from outside the company and therefore hard to imitate. And even if rivals can identify the relevant interconnections, they will have difficulty replicating them. Achieving fit is difficult because it requires the integration of decisions and actions across many independent subunits. A competitor seeking to match an activity system gains little by imitating only some activities and not matching the whole. Performance does not improve; it can decline. Recall Continental Lites disastrous attempt to imitate Southwest. Finall y, fit among a company s activities creates pressure s and incentive s to improv e operational effectiveness, which makes imitation even harde r. Fit mean s tha t poor performanc e in one activity will degrad e the perfo rmanc e in others , so that weaknesses are exposed and more prone to get at-

tention. Conversel y, improvements in one activity will pay dividend s in others . Companie s with strong fit among their activities are rarely inviting targets. Their superiority in strategy and in executio n only compound s thei r advantage s and raises the hurdle for imitators. Whe n activitie s complemen t one anothe r, rivals will get little benefit from imitation unless they successfully match the whole system. Such situation s ten d to promot e winnertake-al l competition . The company that builds the best activity system Toys R Us, for instance wins, while rivals with similar strategies Child World and Li- onel Leisure fall behind. Thus finding a new stra- tegic position is often preferable to being the second or third imitator of an occupied position. The mos t viabl e position s are thos e whos e activit y system s are incompatibl e becaus e of tradeoffs. Strategi c positionin g sets the trade-o ff rules that define how individual activities will be configured and integrated. Seeing strategy in terms of activity systems only makes it clearer why organizational st ructure, systems, and processes need to be strategy-specific. Tailoring organization to strategy, in turn, make s complementaritie s mo re achiev- able and contributes to sustainabilit y. One implicatio n is tha t strategi c 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 strateg y. Conti- nuity also reinforces a company s identit y. Conversel y, frequen t shift s in positionin g are costl y. Not only must a company reconfigure individual activities, but it m ust also realign entire sys-

Alternative Views of Strategy


The Implicit Strategy Model of the Past Decade One ideal competitive position in the indust ry Benchmarkin g of all activitie s and achievin g best practice Aggressive outsourcing and partnering to gain efficiencies Advantages rest on a few key success factors, critical resources, core competencies Flexibilit y and rapid response s to all competitive and market changes

WHAT IS STRATEGY? Sustainable Competitive Advantage Unique competitive position for the company Activities tailored to strategy Clea r trade-off s and choice s vis--vi s competitors Competitive advantage arises from fit across activities Sustainability comes from the activity system, not the parts Operational effectiveness a given

tems . Some activitie s may neve r catc h up to the vacillatin g strateg y. The inevitabl e resul t of frequent shifts in strateg y, or of failure to choose a dis- tinc t positio n in the first place , is metoo or hedge d activit y configurations , inconsistencies across functions, and organizational dissonance. What is strategy? We can now complete the answer to this question. Strategy is creating fit among

a company s activities . The succes s of a strategy depends on doing many things well not just a few and integratin g amon g them . If the re is no fit amon g activities , the re is no distinctiv e strategy and little sustainabilit y. Management reve rts to the simpler task of overseeing independent functions, and operational effectiveness dete rmines an organi- zation s relative performance.

V. R e d is c o v e r in tg a t e g y S r
The Failure to Choose
Why do so many companies fail to have a strategy? Why do manager s avoid makin g strategic choices? Or, having made them in the past, why do managers so often let strategies decay and blur? Commonl y, the threat s to strateg y are seen to emanat e from outsid e a compan y becaus e of changes in technology or the behavior of competitors. Althoug h exte rnal change s can be the problem, the greater threat to strategy often comes from within. A sound strategy is unde rmined by a mis- guided view of competition, by organizational fail- ures, and, especiall y, by the desire to grow. Manager s have becom e confuse d abou t the necessity of making choices. When many companies operate far from the productivity frontie r, trade-offs appea r unnecessa ry. It can see m tha t a well- run company should be able to beat its ineffective rivals on all dimensions simultaneousl y. Taught by popu- lar management thinkers that they do not have to make trade-offs, managers have acquired a macho sense that to do so is a sign of weakness. Unne rve d by forecast s of hypercompetition, manager s increas e its likelihoo d by imitatin g everythin g abou t thei r competitors . Exhor ted to think in terms of revolution, managers chase eve ry new technology for its own sake. The pursuit of operational effectiveness is seductive because it is concrete and actionable. Over the past decade, managers have been under increasing pressur e to delive r tangible , measurabl e performance improvements. Programs in operational effectivenes s produc e reassurin g progress , although superior profitability may remain elusive. Business publications and consultants flood the market with info rmation about what other companies are doing, reinforcing the best-practice mentalit y. Caught up in the race for operationa l effectiveness , many manager s simpl y do not

understan d the need to have a strateg y.

Companie s avoid or blur strategi c choice s for other reasons as well. Conventional wisdom within an indust ry is often strong, homogenizing competition. Some managers mistake customer focus to mea n the y mus t serve all custome r need s or respond to every request from distribution channels. Others cite the desire to prese rve flexibilit y. Organizational realities also work against strategy. Trade-offs are frightening, and making no choice is sometimes prefe rred to risking blame for a bad choice . Companie s imitat e one anothe r in a type of herd behavio r, each assuming rivals know some- thing they do not. Newly empowe red employees, who are urged to seek every possible source of im- provement , ofte n lack a visio n of the whol e and the perspective to recognize tradeoffs. The failure to choose sometimes comes down to the reluctance to disappoint valued managers or employees.

The Growth Trap


Amon g all othe r influences , the desir e to grow has perhap s the mos t pervers e effect on strateg y. Trade-off s and limit s appea r to constrai n growth. Serving one group of customers and excluding others, for instance, places a real or imagined limit on revenue growth. Broadly targeted strategies emphasizing low price result in lost sales with customers sensitive to features or service. Differentiators lose sales to price-sensitive customers. Managers are constantly tempted to take incrementa l step s tha t surpas s thos e limit s but blur a company s strategic position. Eventuall y, pressures to grow or apparent saturation of the target market lead managers to broaden the position by extending product lines, adding new features, imitating competitors popular services, matching processes, and even making acquisitions. For years, Maytag Corporation s succes s was based on its focus on reliable, durable washers and dryers, later extended to include dishwashers. Howeve r, conventional wis-

WHAT IS STRATEGY?

Reconnecting with Strategy


Mos t companie s owe thei r initia l succes s to a uniqu e strategi c positio n involvin g clear trade-o ffs. Activities once were aligned with that position. The passage of time and the pressures of growth, howeve r, led to compromises that were, at first, almost imperceptible . Thr ough a successio n of inc rementa l changes that each seemed sensible at the time, many established companies have comp romised their way to homogeneity with their rivals. The issue here is not with the companies whose historical position is no longer viable; their challenge is to sta rt over, just as a new entrant would. At issue is a far more common phenomenon: the established company achieving mediocre retu rns and lacking a clear strateg y. Throug h incrementa l addition s of product varieties, incremental effo rts to serve new customer groups, and emulation of rivals activities, the existing company loses its clear competitive position. Typically, the company has matched many of its competitors offering s and practice s and attempt s to sell to most customer groups. A number of approaches can help a company reconnect with strateg y. The first is a careful look at what it alread y does. Withi n mos t well-establishe d compa- nies is a core of uniqueness. It is identified by answer- ing questions such as the following: M Whic h of our produc t or servic e varietie s are the most distinctive?
M Whic h of our produc t or servic e varietie s are the

most profitable? M Which of our customers are the most satisfied? M Which customers, channels, or purchase occasions are the most profitable? M Which of the activities in our value chain are the most different and effective? Aroun d thi s core of uniquenes s are enc rustations added incrementally over time. Like barnacles, they must be removed to reveal the underlying strategic po- sitioning. A small percentage of varieties or customers may well account for most of a company s sales and es- pecially its profits. The challenge, then, is to refocus on the unique core and realign the company s activi- ties with it. Customers and product varieties at the periphe ry can be sold or allowed through inattention or price increases to fade awa y. A company s histo ry can also be inst ructive. What was the vision of the founder? What were the products and customers that made the company? Looking back- ward, one can reexamine the original strategy to see if it is still valid. Can the historical positioning be im- plemented in a mode rn way, one consistent with to- days technologies and practices? This sort of thinking may lead to a commitment to renew the strategy and may challenge the organization to recover its distinc- tiveness. Such a challenge can be galvanizing and can instill the confidence to make the needed trade-offs.

dom emergin g withi n the indust ry suppo rted the notion of selling a full line of products. Conce rned with slow indust ry growth and competition from broad-line appliance makers, Maytag was pressured by dealers and encouraged by customers to extend its line. Mayta g expande d int o refrigerator s and cooking products under the Maytag brand and acquire d othe r brand s Jenn-Ai r, Hardwic k Stove, Hoove r, Admiral, and Magic Chef with disparate positions . Mayta g has grown substantiall y from $684 millio n in 1985 to a peak of $3.4 billio n in 1994, but retu rn on sales has declined from 8% to 12% in the 1970s and 1980s to an average of less than 1% between 1989 and 1995. Cost cutting will improv e thi s perfo rmance , but laundr y and dis hwasher products still anchor Maytag s profitabilit y. Neutrogena may have fallen into the same trap. In the early 1990s, its U.S. distribution broadened to includ e mas s me rchandiser s suc h as Wal-Ma rt Stores. Under the Neutrogena name, the company

expande d int o a wide variet y of product s eye-

makeu p remove r and shampoo , for examp le in which it was not unique and which diluted its image, and it began turning to price promotions. Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage a compan y had wit h its origina l varietie s or target customers. Attempts to compete in several ways at once create confusion and unde rmine organizational motivation and focus. Profits fall, but more revenue is seen as the answe r. Managers are unable to make choices, so the company embarks on a new roun d of broadenin g and compromises . Often , rivals continue to match each other until desperation breaks the cycle, resulting in a merger or downsiz- ing to the original positioning.

Profitable Growth
Many companies, after a decade of rest ructuring and cost-cutting , are turnin g thei r attentio n to growth. Too often, effo rts to grow blur uniqueness,

create compromises, reduce fit, and ultimately undermine competitive advantage. In fact, the growth imperative is hazardous to strateg y. Wha t approache s to growt h prese rve and reinforce strategy? Broadly, the prescription is to concentrat e on deepenin g a strategi c positio n rather tha n broadenin g and compromisin g it. One approach is to look for extensions of the strategy that leverag e the existin g activit y syste m by offering features or services that rivals would find impossible or costly to match on a stand-alone basis. In other words, managers can ask themselves which activities , features , or for ms of competitio n are feasible or less costly to them because of complementa ry activities that their company performs. Deepening a position involves making the companys activitie s mo re distinctive , st rengthening fit, and communicating the strategy better to those customers who should value it. But many companies succum b to the temptatio n to chas e easy growth by adding hot features, products, or services without screening them or adapting them to their strateg y. Or they target new customers or markets in which the company has little special to offer. A company can often grow faster and far more profitabl y by bette r penetratin g need s and varieties where it is distinctive than by slugging it out in po- tentially higher growth arenas in which the com- pany lacks uniqueness. Ca rmike, now the largest theater chain in the United States, owes its rapid growt h to its discipline d concentratio n on small markets . The compan y quickl y sells any big-city theaters that come to it as part of an acquisition. Globalization often allows growth that is consis- tent with strateg y, opening up larger markets for a focused strateg y. Unlike broadening domesticall y,

separat e unit s wit h differen t strategi c positions. On the othe r, it has created an umbrella appliance compan y for all its brand s to gain critica l mass. With share d design , manufacturing , distribution, and customer service, it will be hard to avoid homogenization. If a given business unit attempts to compete with different positions for different products or customers, avoiding compromise is nearly impossible.

The Role Leadership

of

The challenge of developing or reestablishing a clear strategy is often primarily an organizational one and depend s on leadership . With so many forces at wor k agains t makin g choice s and tradeoffs in organizations, a clear intellectual framework to guide strateg y is a necessa ry counte rweight. Moreove r, strong leaders willing to make choices are essential. In many companies, leadership has degenerated int o orchestratin g operationa l imp rovement s and making deals. But the leade rs role is broader and far mor e impo rtant . Genera l managemen t is mo re tha n the stewardshi p of individua l functions . Its core is strategy : definin g and communicatin g the company s unique position, making trade-offs, and forging fit among activities. The leader must provide the disciplin e to decid e whic h indust r y changes and customer needs the company will respon d to, whil e avoidin g organizationa l distra ction s and maintainin g the company s distinctiveness. Managers at lower levels lack the perspective and the confidenc e to maintai n a strateg y. There will be constan t pressure s to compromise , relax trade-offs, and emulate rivals. One of the leade rs jobs is to teach others in the organiStrateg y render s choice s about choice s abou t wha t to do. Indeed, leadership . Decidin g whic h target need s the compan y shoul d serve is fundamenta l to developin g a stra tegy. But so is decidin g not to serve

At general management s core is strategy:defining a company position, s making trade-offs,and forgingfit am ong activities.
expandin g globall y is likel y to leverag e and reinforce a company s unique position and identit y.

Companies seeking growth through broadening within their indust ry can best contain the risks to

strategy by creating stand-alone units, each with its own brand name and tailored activities. Maytag has clearly struggled with this issue. On the one hand, it has organized its premium and value brands into

other customers or needs and not to offer certain feature s or services . Thu s strateg y require s constant discipline and clear communication. Indeed, one of the most impo rtant functions of an explicit, communicate d strateg y is to guide employee s in makin g choice s tha t arise becaus e of trade-offs in thei r individua l activitie s and in day-to-day decisions.

Emerging Industries and Technologies


Developing a strategy in a newly emerging indust ry or in a business undergoing revolutiona ry technological changes is a daunting proposition. In such cases, manager s face a high level of unce rtaint y abou t the need s of customers , the product s and service s that will prove to be the most desired, and the best configuration of activities and technologies to deliver them. Because of all this unce rtaint y, imitation and hedging are rampant: unable to risk being wrong or left behind, companies match all features, offer all new services, and explore all technologies. During such periods in an indust rys development, its basic productivity frontier is being established or reestablished. Explosive growth can make such times profitabl e for man y companies , but profit s will be tempora ry becaus e imitatio n and strategi c conve rgence will ultimatel y dest roy indust ry profitabilit y. The companies that are enduringly successful will be those that begin as early as possible to define and embody in their activities a unique competitive position. A period of imitation may be inevitable in emerging industries, but that period reflects the level of uncertainty rather than a desired state of affairs. In high-tech industries, this imitation phase often continues much longer than it should. Enraptured by technological change itself, companies pack more fea- tures most of which are never used into their prod- ucts while slashing prices across the board. Rarely are trade-offs even considered. The drive for growth to sat- isfy marke t pressure s leads companie s int o eve ry product area. Although a few companies with funda- mental advantages prospe r, the majority are doomed to a rat race no one can win. Ironicall y, the popula r busines s press, focuse d on hot, emerging industries, is prone to presenting these special cases as proof that we have entered a new era of competition in which none of the old rules are valid. In fact, the opposite is true.

Improvin g operationa l effectivenes s is a nece ssary part of management, but it is not strateg y. In confusing the two, managers have unintentionally backed into a way of thinking about competition that is driving many industries toward competitive convergence, which is in no ones best interest and is not inevitable. Manager s mus t clearl y distinguis h operational effectiveness from strateg y. Both are essential, but the two agendas are different. The operationa l agend a involve s continua l improvement eve rywhere there are no trade-offs. Failure to do this creates vulnerability even for companies with a good strateg y. The operational agenda is the proper place for constant change, flexibilit y, and relentles s effo rts to achiev e best practice . In contrast, the strategic agenda is the right place for defining a unique position, making clear trade-offs, and tightening fit. It involves the continual search for ways to reinforce and extend the company s position . The strategi c agend a demand s discipline and continuity ; its enemie s are distractio n and compromise. Strategic continuity does not imply a static view of competition. A company must continually improve its operationa l effectivenes s and actively try to shif t the productivit y frontier ; at the same time , ther e need s to be ongoin g effort to extend its uniqueness while strengthening the fit among

its activities . Strategi c continuit y, in fact, should mak e an organization s continua l improvement more effective. A compan y may have to chang e its strateg y if there are major structural changes in its indust ry. In fact, new strategic positions often arise because of indust ry changes , and new entrant s unencu mbered by histo ry often can exploit them more easil y. Howeve r, a company s choic e of a new position must be driven by the ability to find new trade-offs and leverage a new system of complementa ry activ- ities into a sustainable advantage.
1. I first described the concept of activities and its use in understanding competitive advantage in Competitive Advantage (New York: The Free Press, 1985). The ideas in this article build on and extend that thinking. 2. Paul Milgrom and John Robe rts have begun to explore the economics of systems of complementa ry functions, activities, and functions. Their focus is on the emergence of mode rn manufacturing as a new set of complementa ry activities, on the tendency of companies to react to exte rnal changes with coherent bundles of inte rnal responses, and on the need for central coordination a strategy to align functional managers. In the lat- ter case, they model what has long been a bedrock principle of strateg y. See Paul Milgrom and John Robe rts, The Economics of Mode rn Manu- facturing: Technolog y, Strateg y, and Organization, American Economic Review 80 (1990): 511-528; Paul Milgrom, Yingyi Qian, and John Robe rts, Complementarities, Momentum, and Evolution of Mode rn Manufactur- ing, American Economic Review 81 (1991) 84-88; and Paul Milgrom and John Robe rts, Complementarities and Fit: Strateg y, Structure, and Orga- nizational Changes in Manufacturing, Journal of Accounting and Eco- nomics , vol. 19 (March-May 1995): 179-208. 3. Material on retail strategies is drawn in part from Jan Rivkin, The Rise of Retai l Catego ry Killers, unpublishe d workin g paper, Janua ry 1995. Nicolaj Siggelkow prepared the case study on the Gap.

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