What is Strategy?

Michael Porter – What is Strategy

Strategy is not OE

Operational effectiveness isn’t strategy: The root of the problem is the failure to distinguish between operational effectiveness and strategy. The quest for productivity, quality, and speed has spawned a remarkable number of management tools and techniques: total quality management, benchmarking, time-based competition, outsourcing, partnering, reengineering, change management. Although the resulting operational improvements have often been dramatic, many companies have been frustrated by their inability to translate those gains into sustainable profitability. And bit by bit, almost imperceptibly, management tools have taken the place of strategy. As managers push to improve on all fronts, they move farther away from viable competitive positions.
The arithmetic of superior profitability then follows: delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average unit costs.
Activities - Cost is generated by performing activities, and cost advantage arises from performing particular activities more efficiently than competitors. Similarly, differentiation arises from both the choice of activities and how they are performed. Activities, then are the basic units of competitive advantage. Overall advantage or disadvantage results from all a company’s activities, not only a few.
OE – operational effectives as performing similar activities better than rivals. Includes efficiency effectiveness… Such differences in operational effectiveness are an important source of differences in profitability among competitors because they directly affect relative cost positions and levels of differentiation.
Strategic Positioning – Different activities from rivals or similar activities differently
Japanese effect – Japanese came along and made OE the dominant paradigm by delivering better quality more efficiently so at a lower cost. Taught us that defects and costs weren’t a tradeoff (see “rapid changeovers”)

“Japanese Companies Rarely Have Strategies” – While they pioneered TQM and continuous improvement in the 70s and 80s, “But as the gap in operational effectiveness narrows, Japanese companies are increasingly caught in a trap of their own making. If they are to escape the mutually destructive battles now ravaging their performance, Japanese companies will have to learn strategy.”

Culture? – “consensus oriented, and companies have a strong tendency to mediate differences among individuals rather than accentuate them.” The desire to also please the customer can obfuscate their purpose, sometimes the customer is wrong insofar as what they want from you isn’t what you’re providing.

Productivity frontier – Diffusion of best practices pushes the frontier ever further out to where the customer captures the value: “But the resulting major productivity gains are being captured by customers and equipment suppliers, not retained in superior profitability. Even industry-leader Donnelley’s profit margin, consistently higher than 7% in the 1980s, fell to less than 4.6% in 1995.”

Outsourcing as an example a single org cannot be as productive as specialists

Why OE isn’t sufficient – “most obvious reason for that is the rapid diffusion of best practices…” Second reason is “competitive convergence”: the more benchmarking, the more you look alike. Sooner or later, the overlap will lead to attrition and mutual destruction. Mergers as a stand-in for strategy such that acquisition is believed to be the same as strategic direction.

Strategy Rests on Unique Activities

Competitive strategy as deliberately choosing a different set of activities to deliver a unique mix of value.
There is a danger in describing strategic positioning in terms of your customer. For example, what do we misunderstand if we only think of Southwest as serving “price and convenience sensitive travelers…” Southwest isn’t hedging, it’s saying, we’re going to do this entire set of different activities such that we’re not even thought of in the same class as a “full-service airline.” There is a “hedging” impulse to accommodate some of what’s common so that you might capture those interested / curious. But they’ll likely be unhappy because they wanted similar, not different.

I realized a long time ago I was different and trying to act similar. My life got a lot more joyful when I stopped that charade.

What turns marketing into a strategic position is a tailored set of activities that make it work.
Typical furniture store that has high choice affording maxmimal customization but incurs a cost to supply such.
“Finding new positions: The entrepreneurial edge”

Danger of ‘straddling’: New entrants can prosper by occupying a position that a competitor 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. CarMax borrows heavily from Circuit City’s expertise in inventory management, credit, and other activities in consumer electronics retailing.
What once was distinct may now be outdated, so change offers opportunity.

Ikea as an example of intentional choice: In contrast, Ikea serves customers who are happy to trade off service for cost. Instead of having a sales associate trail customers around the store, Ikea uses a self-service model based on clear, instore displays. Rather than rely solely on third-party manufacturers, Ikea designs its own low-cost, modular, ready-to assemble furniture to fit its positioning. In huge stores, Ikea displays every product it sells in room-like settings, so customers don’t need a decorator to help them imagine how to put the pieces together. Adjacent to the furnished showrooms is a warehouse section with the products in boxes on pallets. Customers are expected to do their own pickup and delivery, and Ikea will even sell you a roof rack for your car that you can return for a refund on your next visit.
The origins of strategic positions: Strategic positioning can be based on customers’ needs, customers’ accessibility, or the variety of a company’s product or services.

Variety based positioning – Focusing on a subset of an industry’s products or services. So based on product or service varieties rather than customer segment.

Jiffy Lube: 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,
The people who use Vanguard or Jiffy Lube are responding to a superior value chain for a particular type of service. A varietybased positioning can serve a wide array of customers, but for most it will meet only a subset of their needs.

Needs based positioning - It arises when there are groups of customers with differing needs, and when a tailored set of activities can serve those needs best.

A variant of needs-based positioning arises when the same customer has different needs on different occasions or for different types of transactions.
Important: Differences in needs will not translate into meaningful positions unless the best set of activities to satisfy them also differs. If that were not the case, every competitor could meet those same needs, and there would be nothing unique or valuable about the positioning.
Citibank vs. Bessemer Trust: The former has private wealth clients at $250k whereas the latter has a floor of $5M. This translates into a client-to-employee ratio of 1:125 vs. 1:14, respectively. B oth Bessemer and Citibank have tailored their activities to meet the needs of a different group of private banking customers. The same value chain cannot profitably meet the needs of both groups.

Access-based positioning – Carmike example of only operating in areas with less than 200k

Generic Strategies: Cost leadership, differentiation and focus. “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. Neutrogena is a focused differentiator. The bases for positioning—varieties, needs, and access—carry the understanding of those generic strategies to a greater level of specificity. Ikea and Southwest are both cost based focusers, for example, but Ikea’s focus is based on the needs of a customer group, and Southwest’s is based on offering a particular service variety.” He notes that a misunderstood aspect of his “generic strategies” was the inability for folks to understand the tradeoffs necessary in choosing one lane over another.
Positioning - Positioning is not only about carving out a niche. A position emerging from any of the sources can be broad or narrow. A focused competitor, such as Ikea, targets the special needs of a subset of customers and designs its activities accordingly. Focused competitors thrive on groups of customers who are overserved (and hence overpriced) by more broadly targeted competitors, or underserved (and hence underpriced). A broadly targeted competitor—for example, Vanguard or Delta Air Lines— serves a wide array of customers, performing a set of activities designed to meet their common needs. It ignores or meets only partially the more idiosyncratic needs of particular customer customer groups.

“Positioning requires a tailored set of activities because it is always a function of differences on the supply side; that is, of differences in activities.”
Isn’t this a distinction without a difference?: Variety and access positionings, in particular, do not rely on any customer differences. In practice, however, variety or access differences often accompany needs differences. The tastes—that is, the needs—of Carmike’s small-town customers, for instance, run more toward comedies, Westerns, action films, and family entertainment. Carmike does not run any films rated NC-17.

Strategy is the creation of a unique and valuable position, involving different set of activities.

A Sustainable Strategic Position Requires Trade-offs

Michael Porter – What is Strategy

Strategy is not OE

Operational effectiveness isn’t strategy: The root of the problem is the failure to distinguish between operational effectiveness and strategy. The quest for productivity, quality, and speed has spawned a remarkable number of management tools and techniques: total quality management, benchmarking, time-based competition, outsourcing, partnering, reengineering, change management. Although the resulting operational improvements have often been dramatic, many companies have been frustrated by their inability to translate those gains into sustainable profitability. And bit by bit, almost imperceptibly, management tools have taken the place of strategy. As managers push to improve on all fronts, they move farther away from viable competitive positions.
The arithmetic of superior profitability then follows: delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average unit costs.
Activities - Cost is generated by performing activities, and cost advantage arises from performing particular activities more efficiently than competitors. Similarly, differentiation arises from both the choice of activities and how they are performed. Activities, then are the basic units of competitive advantage. Overall advantage or disadvantage results from all a company’s activities, not only a few.
OE – operational effectives as performing similar activities better than rivals. Includes efficiency effectiveness… Such differences in operational effectiveness are an important source of differences in profitability among competitors because they directly affect relative cost positions and levels of differentiation.
Strategic Positioning – Different activities from rivals or similar activities differently
Japanese effect – Japanese came along and made OE the dominant paradigm by delivering better quality more efficiently so at a lower cost. Taught us that defects and costs weren’t a tradeoff (see “rapid changeovers”)

“Japanese Companies Rarely Have Strategies” – While they pioneered TQM and continuous improvement in the 70s and 80s, “But as the gap in operational effectiveness narrows, Japanese companies are increasingly caught in a trap of their own making. If they are to escape the mutually destructive battles now ravaging their performance, Japanese companies will have to learn strategy.”

Culture? – “consensus oriented, and companies have a strong tendency to mediate differences among individuals rather than accentuate them.” The desire to also please the customer can obfuscate their purpose, sometimes the customer is wrong insofar as what they want from you isn’t what you’re providing.

Productivity frontier – Diffusion of best practices pushes the frontier ever further out to where the customer captures the value: “But the resulting major productivity gains are being captured by customers and equipment suppliers, not retained in superior profitability. Even industry-leader Donnelley’s profit margin, consistently higher than 7% in the 1980s, fell to less than 4.6% in 1995.”

Outsourcing as an example a single org cannot be as productive as specialists

Why OE isn’t sufficient – “most obvious reason for that is the rapid diffusion of best practices…” Second reason is “competitive convergence”: the more benchmarking, the more you look alike. Sooner or later, the overlap will lead to attrition and mutual destruction. Mergers as a stand-in for strategy such that acquisition is believed to be the same as strategic direction.

Strategy Rests on Unique Activities

Competitive strategy as deliberately choosing a different set of activities to deliver a unique mix of value.
There is a danger in describing strategic positioning in terms of your customer. For example, what do we misunderstand if we only think of Southwest as serving “price and convenience sensitive travelers…” Southwest isn’t hedging, it’s saying, we’re going to do this entire set of different activities such that we’re not even thought of in the same class as a “full-service airline.” There is a “hedging” impulse to accommodate some of what’s common so that you might capture those interested / curious. But they’ll likely be unhappy because they wanted similar, not different.

I realized a long time ago I was different and trying to act similar. My life got a lot more joyful when I stopped that charade.

What turns marketing into a strategic position is a tailored set of activities that make it work.
Typical furniture store that has high choice affording maxmimal customization but incurs a cost to supply such.
“Finding new positions: The entrepreneurial edge”

Danger of ‘straddling’: New entrants can prosper by occupying a position that a competitor 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. CarMax borrows heavily from Circuit City’s expertise in inventory management, credit, and other activities in consumer electronics retailing.
What once was distinct may now be outdated, so change offers opportunity.

Ikea as an example of intentional choice: In contrast, Ikea serves customers who are happy to trade off service for cost. Instead of having a sales associate trail customers around the store, Ikea uses a self-service model based on clear, instore displays. Rather than rely solely on third-party manufacturers, Ikea designs its own low-cost, modular, ready-to assemble furniture to fit its positioning. In huge stores, Ikea displays every product it sells in room-like settings, so customers don’t need a decorator to help them imagine how to put the pieces together. Adjacent to the furnished showrooms is a warehouse section with the products in boxes on pallets. Customers are expected to do their own pickup and delivery, and Ikea will even sell you a roof rack for your car that you can return for a refund on your next visit.
The origins of strategic positions: Strategic positioning can be based on customers’ needs, customers’ accessibility, or the variety of a company’s product or services.

Variety based positioning – Focusing on a subset of an industry’s products or services. So based on product or service varieties rather than customer segment.

Jiffy Lube: 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,
The people who use Vanguard or Jiffy Lube are responding to a superior value chain for a particular type of service. A varietybased positioning can serve a wide array of customers, but for most it will meet only a subset of their needs.

Needs based positioning - It arises when there are groups of customers with differing needs, and when a tailored set of activities can serve those needs best.

A variant of needs-based positioning arises when the same customer has different needs on different occasions or for different types of transactions.
Important: Differences in needs will not translate into meaningful positions unless the best set of activities to satisfy them also differs. If that were not the case, every competitor could meet those same needs, and there would be nothing unique or valuable about the positioning.
Citibank vs. Bessemer Trust: The former has private wealth clients at $250k whereas the latter has a floor of $5M. This translates into a client-to-employee ratio of 1:125 vs. 1:14, respectively. B oth Bessemer and Citibank have tailored their activities to meet the needs of a different group of private banking customers. The same value chain cannot profitably meet the needs of both groups.

Access-based positioning – Carmike example of only operating in areas with less than 200k

Generic Strategies: Cost leadership, differentiation and focus. “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. Neutrogena is a focused differentiator. The bases for positioning—varieties, needs, and access—carry the understanding of those generic strategies to a greater level of specificity. Ikea and Southwest are both cost based focusers, for example, but Ikea’s focus is based on the needs of a customer group, and Southwest’s is based on offering a particular service variety.” He notes that a misunderstood aspect of his “generic strategies” was the inability for folks to understand the tradeoffs necessary in choosing one lane over another.
Positioning - Positioning is not only about carving out a niche. A position emerging from any of the sources can be broad or narrow. A focused competitor, such as Ikea, targets the special needs of a subset of customers and designs its activities accordingly. Focused competitors thrive on groups of customers who are overserved (and hence overpriced) by more broadly targeted competitors, or underserved (and hence underpriced). A broadly targeted competitor—for example, Vanguard or Delta Air Lines— serves a wide array of customers, performing a set of activities designed to meet their common needs. It ignores or meets only partially the more idiosyncratic needs of particular customer customer groups.

“Positioning requires a tailored set of activities because it is always a function of differences on the supply side; that is, of differences in activities.”
Isn’t this a distinction without a difference?: Variety and access positionings, in particular, do not rely on any customer differences. In practice, however, variety or access differences often accompany needs differences. The tastes—that is, the needs—of Carmike’s small-town customers, for instance, run more toward comedies, Westerns, action films, and family entertainment. Carmike does not run any films rated NC-17.

Strategy is the creation of a unique and valuable position, involving different set of activities.

A Sustainable Strategic Position Requires Trade-offs