Summary - What is Strategy?

The ability the make an informed decision about how, when and where to target a customer
group, facilitate resources and set objectives(limits) makes the difference between a manager
who thinks from a strategic perspective in light of what might emerge in future. Anticipating
those movements into current decision-making helps to set a stage to create sustainable
advantages.
Porter argues that positioning is still a notable way to shape advantages within a company and
sees hypercompetition as rather odd concept to explain shifting patterns in competition and
points out that a misunderstanding exists to distinguish between operational effectiveness and
strategy. The replacement of strategy by so-called management tools has been responsible
why many firms have increased operational effectiveness but have been unable to translate
those improvements into values for customer where profit can be earned and profitability be
increased.
Differences in profitability compared with competitors arises because of activities chosen in
order to deliver customer value. Those can be either that similar activities are combined on a
much lower cost base (unit cost) or the average unit price is higher due to superior perceived
value.
Operational effectiveness is not strategy
Porter refers to operational effectiveness (OE) as the means of performing similar activities
better than rivals and strategic positioning as the means to perform activities in a different
way. He uses the Japanese manufacturing during the 1980s as example to show that
operational effectiveness 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 employed 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 effectiveness seemed to be a strategic advantage.
He borrowed a concept from economics (possible production frontier) to introduce what he
called productivity frontier to show a frontier curve for a maximum possible productivity
(value) on a selected process. The combination of used methods (activities) with inputs allows
to assign cost factors to demonstrate a companies relative productivity position. Based on a
companys input and its used methods the cost factor can be compared with other best
practices and indicate their operational effectiveness.
The pure reliance on operational effectiveness as strategy replacement works only as long
competitors not employing to same process and improvements but as soon those best practices
are made common within the industry, operational effectiveness becomes mutual destructive
and counter-productive with imitations and homogeneity as end result.
Strategy rest on unique activities

Porter postulates that real competitive strategy can only be about being different with
deliberately choosing a different way to deliver a mix of values and activities.
Southwest Airlines found a position as provider for low-cost low-thrill, standardized provider
of flights within US for a value-based but low-cost position where other airlines have
difficulties to met the same cost structure and activities and therefore can not compete on the
chosen activity-value combination.
Ikea is cited as example that chooses a position as low-cost provider within the furniture
industry where customer are targeted under a self-serving model. The combination of
functional design, streamlined manufacturing and a modular furniture system have
been successful deployed to gain scale economies and a lower cost base. Those combined
activities are different to established service oriented activities within this furniture industry.
Targeted on do-it-yourself, young families that look for contemporary design and
a possibility to combine various furniture into an individual style served as strategic position,
taken into account that the service factor has been deliberately altered by choosing a valuecost model, large store displays and self delivery 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 creativity,
vision, method and technology to a unique set of activities to be valuable for both the
company and its customer makes it an outstanding intellectual challenge.
Porter divides between variety-based positioning,needs-based positioning and access-based
positioning. He defines variety-based positioning as a selection process where products are
selected due to superior value 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.
Serving 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 provider with tailoring service.
Thus building a platform of activities that can deliver solutions for various needs and at the
same time can be differentiated from competitors is vital to serve as competitive advantages.
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 activities is responsible to maintain
sustainable advantages and this optimum comes with trade-offs that will not allow every
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 activities behind.
Those trade-offs occur when activities are incompatible[Porter 1996:68] and might come
from missing skills, heritage, inoperable change management etc..
Imitators are by far the biggest threat for a companys position, to protect ones position
choices have to be made, barriers to be raised to ensure their are not easily to
overcome. Barriers such as image, technology or intellectual property can help to protect but

they need constant review in terms of diffusion and adoption and operational effectiveness
can be excluded as potential barrier since diffusion rate is far to high to be a lasting factor.
Benchmarking can be used as yardstick to see current conditions of the productivity frontier
within an industry but rather to see as a tool to imitate and improve operational efficiency it
should be used as method to identify activities that can done differently. Benchmarking as tool
but not loose sight on developments in terms of industry wide quality improvements and
technological advancements.
Continental Airlines failed an attempt with Continental Lite to maintain a full-service image
while challenging and imitate Southwest Airlines business concept. Neutrogenas rigorous
decision not to alter its image (research based, medical proved soap) and maintain a unique
position with manufacturing processes that does not uses deodorants or skin softener, put
product attributes over manufacturing efficiency.
Porters sees it as inevitable that choices are made that limit a companies offering, reach and
availability to ensure focused activities by not being everything to everybody.
Strategy is about choices and about what not do.
Fit drives both competitive advantage and sustainability
The right mix or as Porters puts it strategy is about combining activities[Porter 1996:70],
synergies that come from combining the right activities and leave other activities 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 activities that full fill a companies mission to accelerate competitive
advantage and profitability.
Most companies in the same industry carry out similar activities but the company with the
best fit on complementary activities along the value 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 types of fits; simple consistency fit, activities reinforcing fit
and optimization of effort fit. Create consistency among functional activities throughout the
company to serve the main strategic goals, an ability to reinforce activities and
communication and optimize activities 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 external environment.
He warns that focusing too much on core competence and success factors without taken every
individual activity into account can lead to false interpretation of a companys strength in
terms of its capability and resources. The reduction on core competencies simplifies the
organizational view but at the same time clouds the understanding of interconnection of
visible and non visible functional activities.

Unrevealing those connections, Porter suggests an activity mapping as analytical process to

visualization and illustration of those interrelation. Always with the idea in mind that a
company is a chain of activities also known as value 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 manoeuvre to overcome a barrier.
A company that focuses on a system of activities [Porter 1996:73] as competitive barrier rather
than individual selected activities (technologies, resources, skills) seems more likely to sustain
and build competitive advantages over a time.
Technology, capital or skills are important but not everything to achieve competitive
advantage. Interconnections between assets and its functional execution is as of similar
importance. This includes the ability on how to reach decisions, what to communicate etc. all
are part of a system of activities serving a particular goal and mission.
Coordinating and executing this system of activities is the real strategic capability of any
organization as it requires long-term commitment and a positioning that looks beyond
currents trends and short-term goals.
Strategy is about finding complementary activities that create an internal and external fit.
Rediscovering 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 exponentially are examples for unsuccessful strategy making and execution.
Best practice and operational effectiveness have 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 driver is useful as long as it serves 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 objectives without adding additional values for
the existing activities will have similar effects, dilution. Porter describes this as growth trap
and cites Neutrogena and Maytag as examples.
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 1996:78] and only the continues
effort to find a unique position will ensure a competitive standing and profitability.

Reference
Michael E Porter, (1996) What is Strategy?, Harvard Business Review, NovemberDecember: 61-78
Henry Mintzberg, Sumantra Ghoshal, Joseph B Lampel, James B Quinn (2002) The Strategy
Process: Concepts, Context, Cases,4th Edition, Prentice Hall