Reflections

Reading, writing and maybe understanding a bit more

What is Strategy? (Porter 1996)

Posted on October 22, 2010 | 1 Comment

T itle: Status: Author: Source: Key word: Citation:

What is Strategy ? In rev iew , [UUID] Michael E Porter + Harv ard Business Rev iew, Nov ember-December: 61 -7 8 Strategy + , Operational Effectiv eness+ , Strategic Positioning+ , Core Competence + Porter 1 996 + Michael E Porter, (1 996) What is Strategy?, Harv ard Business Rev iew, Nov ember-December: 61 -7 8 BibTe X,S cholar

Michael Porter is associated with the positioning school (Mintzberg 2002:23), whos analy tical approach sees strategy making mainly based on a process to identify driv ers(forces) of intraindustry competition and its corresponding barriers. His reasoning is based on the assumption that a company who deliberately choose a position within an industry and at the same time is able to combine activ ities in a different fashion, can create sustainable competitiv e adv antages that will lead to profitability and with it sustain competition. Aside this more general position of Porter, in an article from 1 996, he asks What is Strategy and discussed operational efficiency in connection with strategy making and he adv ised that those two things should not (can not) be used interchangeably . Below their is a summary of Porters main arguments from his article and what he sees as main components on strategy and how to distinguish between operational efficiency and strategy .

SUMMARY
The ability the make an informed decision about how, when and where to target a customer group, facilitate resources and set objectiv es(limits) makes the difference between a manager who thinks from a strategic perspectiv e in light of what might emerge in future. Anticipating those mov ements into current decision-making helps to set a stage to create sustainable adv antages. Porter argues that positioning is still a notable way to shape adv antages within a company and sees hy percompetition as rather odd concept to ex plain shifting patterns in competition and points out that a misunderstanding ex ists to distinguish between operational effectiv eness and strategy .

The replacement of strategy by so-called management tools has been responsible why many firms hav e increased operational effectiv eness but hav e been unable to translate those improv ements into v alues for customer where profit can be earned and profitability be increased. Differences in profitability compared with competitors arises because of activ ities chosen in order to deliv er customer v alue. Those can be either that similar activ ities are combined on a much lower cost base (unit cost) or the av erage unit price is higher due to superior perceiv ed v alue. Operational effectiv eness is not strategy Porter refers to operational effectiv eness (OE) as the means of performing similar activities better than rivals and strategic positioning as the means to perform activities in a different w ay. He uses the Japanese manufacturing during the 1 980s as ex ample to show that operational effectiv eness can be responsible for lower cost and superior quality among those Japanese companies but question a unique strategic position of those companies. He shows that an industry (Japanese electronic industry ) has worked as cluster of competitors within this industry . The Japanese companies could not win market share within their own industry because most companies employ ed similar processes and methodology and had a similar cost-base therefore the strategic decision of those firms was to go a broad and compete outside of Japan where operational effectiv eness seemed to be a strategic adv antage. He borrowed a concept from economics (possible production frontier) to introduce what he called productiv ity frontier to show a frontier curv e for a max imum possible productiv ity (v alue) on a selected process. The combination of used methods (activ ities) with inputs allows to assign cost factors to demonstrate a companies relativ e productiv ity position. Based on a company s input and its used methods the cost factor can be compared with other best practices and indicate their operational effectiv eness. The pure reliance on operational effectiv eness as strategy replacement works only as long competitors not employ ing to same process and improv ements but as soon those best practices are made common within the industry , operational effectiv eness becomes mutual destructiv e and counter-productiv e with imitations and homogeneity as end result. Strategy rest on unique activ ities Porter postulates that real competitiv e strategy can only be about being different with deliberately choosing a different way to deliv er a mix of v alues and activ ities. Southwest Airlines found a position as prov ider for low-cost low-thrill, standardized prov ider of flights within US for a v alue-based but low-cost position where other airlines hav e difficulties to met the same cost structure and activ ities and therefore can not compete on the chosen activ ity -v alue combination. Ikea is cited as ex ample that chooses a position as low-cost prov ider within the furniture industry where customer are targeted under a self-serv ing model. The combination of functional design, streamlined manufacturing and a modular furniture sy stem hav e been successful deploy ed to gain

scale economies and a lower cost base. Those combined activ ities are different to established serv ice oriented activ ities within this furniture industry . Targeted on do-it-y ourself, y oung families that look for contemporary design and a possibility to combine v arious furniture into an indiv idual sty le serv ed as strategic position, taken into account that the serv ice factor has been deliberately altered by choosing a v alue-cost model, large store display s and self deliv ery to fit the chosen image. Strategic positioning as a guiding factor to find positions that are new or not filled by products or customers and while not easy to be identifiable, a managers ability to combine creativ ity , v ision, method and technology to a unique set of activ ities to be v aluable for both the company and its customer makes it an outstanding intellectual challenge. Porter div ides between v ariety -based positioning,needs-based positioning and access-based positioning. He defines v ariety -based positioning as a selection process where products are selected due to superior v alue chain optimization that produces a specialized product within an industry segment. Its reliable performance and consistency makes it a subset of choices for customers to full fill a sufficient need. Serv ing all needs on a particular customer segment, is named by Porter as needs-based positioning with a customer in mind that wants to reduce search cost and looks for a solution from one prov ider with tailoring serv ice. Thus building a platform of activ ities that can deliv er solutions for v arious needs and at the same time can be differentiated from competitors is v ital to serv e as competitiv e adv antages. Strategy is about finding a unique position by combining a unique set of activities A Sustainable strategic position requires trade-offs Porter argues that only the optimal (right) mix of activ ities is responsible to maintain sustainable adv antages and this optimum comes with trade-offs that will not allow ev ery company to participate fully . This implies that a company should know its limits and that it should know that certain sacrifices can not be made without putting other activ ities behind. Those trade-offs occur w hen activities are incompatible [Porter 1 996:68] and might come from missing skills, heritage, inoperable change management etc.. Imitators are by far the biggest threat for a company s position, to protect ones position choices hav e to be made, barriers to be raised to ensure their are not easily to ov ercome. Barriers such as image, technology or intellectual property can help to protect but they need constant rev iew in terms of diffusion and adoption and operational effectiv eness can be ex cluded as potential barrier since diffusion rate is far to high to be a lasting factor. Benchmarking can be used as y ardstick to see current conditions of the productiv ity frontier within an industry but rather to see as a tool to imitate and improv e operational efficiency it should be used as method to identify activ ities that can done differently . Benchmarking as tool but not loose sight on dev elopments in terms of industry wide quality improv ements and technological adv ancements. Continental Airlines failed an attempt with Continental Lite to maintain a full-serv ice image while

challenging and imitate Southwest Airlines business concept. Neutrogenas rigorous decision not to alter its image (research based, medical prov ed soap) and maintain a unique position with manufacturing processes that does not uses deodorants or skin softener, put product attributes ov er manufacturing efficiency . Porters sees it as inev itable that choices are made that limit a companies offering, reach and av ailability to ensure focused activ ities by not being ev ery thing to ev ery body . Strategy is about choices and about w hat not do. Fit driv es both com petitiv e adv antage and sustainability The right mix or as Porters puts it strategy is about com bining activ ities[Porter 1 996:7 0], sy nergies that come from combining the right activ ities and leav e other activ ities aside are essential part of the strategy making equation. Core competence and key success factors are components but only connection of a fit with other complementary activ ities that full fill a companies mission to accelerate competitiv e adv antage and profitability . Most companies in the same industry carry out similar activ ities but the company with the best fit on complementary activ ities along the v alue chain can claim better integration and therefore can reach a better cost base(supply ) or a distinguishable customer relationship(demand). Those two factors are main components to profitability . Porter distinguish three ty pes of fits; simple consistency fit, activ ities reinforcing fit

and optimization of effort fit. Create consistency among functional activ ities throughout the company to serv e the main strategic goals, an ability to reinforce activ ities and communication and optimize activ ities on a constant basis to identify waste and eliminate redundancy . Stately reiterate the question on how to do better and eliminate redundancy to renew fit between internal capabilities and the ex ternal env ironment. He warns that focusing too much on core competence and success factors without taken ev ery indiv idual activ ity into account can lead to false interpretation of a company s strength in terms of its capability and resources. The reduction on core competencies simplifies the organizational v iew but at the same time clouds the understanding of interconnection of v isible and non v isible functional activ ities. Unrev ealing those connections, Porter suggests an activ ity mapping as analy tical process to v isualization and illustration of those interrelation. Alway s with the idea in mind that a company is a chain of activ ities also known as v alue chain. Porter suggest that those interconnections are the heart of any strategy , as those links (chains) are hard to imitate therefore lead to sustainability which is an ultimate goal of strategy otherwise it would be just tactical manoeuv re to ov ercome a barrier. A company that focuses on a system of activities [Porter 1 996:7 3] as competitiv e barrier rather

than indiv idual selected activ ities (technologies, resources, skills) seems more likely to sustain and build competitiv e adv antages ov er a time. Technology , capital or skills are important but not ev ery thing to achiev e competitiv e adv antage. Interconnections between assets and its functional ex ecution is as of similar importance. This includes the ability on how to reach decisions, what to communicate etc. all are part of a sy stem of activ ities serv ing a particular goal and mission. Coordinating and ex ecuting this sy stem of activ ities is the real strategic capability of any organization as it requires long-term commitment and a positioning that looks bey ond currents trends and short-term goals. Strategy is about finding complementary activities that create an internal and external fit. Rediscov ering strategy The failure to choose a strategic position, the misunderstanding of competition and its related forces, organizational mismanagement, the reliance on technology and the desire to grow ex ponentially are ex amples for unsuccessful strategy making and ex ecution. Best practice and operational effectiv eness hav e been seen as substitute and barometer for success and misleading the direction in building a position that is different from others and would make imitation difficult. Growth as policy driv er is useful as long as it serv es the strategic position and not dilutes the focus. Reaching a broader customer group can alter ones unique position and image. Using M&A strategies to foster growth objectiv es without adding additional v alues for the ex isting activ ities will hav e similar effects, dilution. Porter describes this as growth trap and cites Neutrogena and May tag as ex amples. He asks for courage and leadership to make deliberate decisions to limit a companies reach and at the same sharpen its focus. He remind us that improving operational effectiveness is a necessary part of management, but it is not strategy [Porter 1 996:7 8] and only the continues effort to find a unique position will ensure a competitiv e standing and profitability .

REFERENCE
Michael E Porter, (1 996) What is Strategy ?, Harv ard Business Rev iew, Nov ember-December: 61 -7 8 Henry Mintzberg, Sumantra Ghoshal, Joseph B Lampel, James B Quinn (2002) The Strategy Process: Concepts, Contex t, Cases,4th Edition, Prentice Hall

About these ads

Share this:

This entry was posted in Strategy and tagged Operational Effectiv eness, Strategy . Bookmark the permalink.

ONE RESPONSE TO WHAT IS STRATEGY? (PORTER 1996)

Peter L. | November 23, 2010 at 12:14 am |

Porter was himself fed up with strategy s lost intellectual currency during the height of the internet bubble and said so in a 2001 article in Fast Company . An author who is alway s worth rereading.

Theme: Coraline by Automattic.

Blog at WordPress.com.