What is Strategy ?

By Michael E. Porter

Presented by Devang Gargieya

Introduction • Operational effectiveness means performing these activities

better—that is, faster, or with fewer inputs and defects—than rivals.

• Productivity frontier the maximum value a company can deliverat a given cost, given the best available technology, skills, andmanagement techniques

• Competitive convergence Situation inwhich competition among suppliers of a product is so intense thatthere is little or no differentiation left on the basis of whicha buyer may choose one supplier over the other.

• Strategic positioning attempts to achieve sustainable competitiveadvantage by preserving what is distinctive about a company. Itmeans performing different activities from rivals, or performingsimilar activities in different ways.

Introduction

• Key principles under Strategic positioning

1. Strategy is the creation of a unique and valuableposition, involving a different set of activities

Need Customer Market Example

Few Many Wide Jiffy lube –automobilelubricant

Broad Few Wide Bessemer Trust-Wealthy clients

Broad Many Narrow CarmikeCinemas –populationbelow 2lacs

Introduction

• Key principles under Strategic positioning2. Strategy requires you to make trade-offs in

competing Example : Maytag corporation

1893-washing machines

1940- military equipments

1946- washing machine resumed

1946- automatic washer

1950- white goods/ kitchen appliance▫ Entered commercial as well as consumer market and doubled its

size by acquisition ( magic chief and chicago corporation) – 70%

Expansion and growth hunger caused maytag $ 50 million forUK plant (round trip offer)

1997- Neptune washer was launched which caused manyconsumer complaints making stains on company’sreputation)

2006- finally whirlpool took over the company

Introduction

• Key principles under Strategic positioning

3. Strategy involves creating “fit” among acompany’s activities.

Fit drives both competitive advantage andsustainability: when activities mutually reinforceeach other, competitors can’t easily imitate them.

Operational effectiveness vs. Strategic

positioning • To survive in today’s competitive environment

▫ Companies must be flexible to respond to changes.▫ They must benchmark continuously.▫ They must outsource aggressively▫ They must nurture a few core competencies

• But this results into copying market position andalthough it bring competitive advantage buttemporarily, moving them towards mutuallydestructive competition ( called hyper-competition)

• The root of the problem is the failure to distinguishbetween operational effectiveness and strategy. Thequest for productivity, quality, and speed hasspawned a remarkable number of management toolsand techniques

Operational effectiveness vs. Strategic

positioning

• Activities are basic unit of competitive advantage

• Operational effectiveness (OE) meansperforming similar activities better than rivalsperform them.

• Whereas strategic positioning meansperforming different activities from rivals’ orperforming similar activities in different ways

• Constant improvement in operationaleffectiveness is necessary to achieve superiorprofitability. However, it is not usually sufficient.

Operational effectiveness vs. Strategic

positioning

• OE is insufficient because of two reasons :

1. OE competition shifts the productivity frontieroutward, effectively raising the bar for everyone.But although such competition producesabsolute improvement in operationaleffectiveness, it leads to relative improvementfor no one. (sub vs. ratio)

2. The more benchmarking companies do, themore they look alike

Operational effectiveness vs. Strategic

positioning

• Driven by performance pressures but lackingstrategic vision, company after company has hadno better idea than to buy up its rivals. Thecompetitors left standing are often those thatoutlasted others, not companies with realadvantage because gradually managers have letoperational effectiveness replace strategy. Theresult is no competition, static or decliningprices, and pressures on costs that compromisecompanies’ ability to invest in the business forthe long term.

Operational effectiveness vs. Strategic

positioning

• Example

▫ The Japanese were so far ahead of rivals inoperational effectiveness that they could offerlower cost and superior quality at the same timebut the constantly shifting productivity frontierresulted into down fall.

Creating uniqueness in tailored set of

activities

• Competitive strategy is about being different. Itmeans deliberately choosing a different set ofactivities to deliver a unique mix of value.

• Example

Southwest airline Other airlines

Short hauls, low cost, mid sizedcities and avoiding major airport

Large destination

Automated ticketing counter –cost cutting and avoidance ofqueue

Comfortable passenger , Sittingoptions and baggage transfer

Targeting students, business classand families

Tourists, etc

Creating uniqueness in tailored set of

activities

• Example

• What turns this marketing concept into astrategic positioning is the tailored set ofactivities that make it work.

Ikea Other furnituremanufacturer

Room view presentation, low costand store care unit

Section wise , assistant requiredfor guidance

Instant delivery and DIY Late delivery and third partymanufactured.

Young costumer Wide customer

Creating uniqueness in tailored set of

activities • Principles of Strategic positioning

▫ Variety based position (few needs and manycustomer) –when a company can best producesparticular products or services using distinctivesets of activities

Eg. Jiffy lube – automotive lubricant (north America2000 stores)

Vanguard group – common stocks, bonds and moneymarket funds

▫ Needs based positioning (broad needs and fewcustomers) - It arises when there are groups ofcustomers with differing needs, and when atailored set of activities can serve those needs best.

Creating uniqueness in tailored set of

activities

• Principles of Strategic positioning Eg. Bessemer Trust Company targets families with a

minimum of $5 million in investable assets byassigning one sophisticated account officer for every14 families

Similarly Citibank Private Bank targets $ 2,50,000assigning one officer for 125 families

▫ Access-based positioning ( broad need andmany customers but narrow market) - Access canbe a function of customer geography or customerscale—or of anything that requires a different setof activities to reach customers in the best way

Creating uniqueness in tailored set of

activities • Principles of Strategic positioning

Eg. Carmike Cinemas operates movie theatersexclusively in cities and towns with populationsunder 200,000.

• Positioning is not only about carving out a niche.A position emerging from any of the can bebroad or narrow. A focused competitor, such asIkea, targets the special needs of a subset ofcustomers and designs its activities accordingly.

• Strategy is the creation of a unique andvaluable position, involving a different set ofactivities

A suitable strategic position requires

trade- offs (we can’t have everything)

• A valuable position will attract imitation byincumbents, who are likely to copy it in one oftwo ways.

1. A competitor can reposition itself to match thesuperior performer

2. By straddling and getting benefits of asuccessful position while maintaining itsexisting position.

• A trade-off means that more of one thingnecessitates less of another due toincompatibility of activities

A suitable strategic position requires

trade- offs (we can’t have everything) Example : Neutrogena corporation positioned itself

as medical drug instead of regular soap. The trade-offs were no deodorant or skin softener and hugecustomer base of super market sales.

• Reasons for trade-offs

▫ Inconsistencies in image or reputation

▫ Trade-offs arise from activities themselves.Different positions (with their tailored activities)require different product configurations, differentequipment, different employee behavior, differentskills, and different management systems.

▫ limits on internal coordination and control

A suitable strategic position requires

trade- offs (we can’t have everything)

• Positioning trade-offs are pervasive incompetition and essential to strategy. They createthe need for choice and purposefully limit what acompany offers. They deter straddling orrepositioning, because competitors that engage inthose approaches undermine their strategies anddegrade the value of their existing activities.

• Simultaneous improvement of cost anddifferentiation is possible only when a companybegins far behind the productivity frontier orwhen the frontier shifts outward

A suitable strategic position requires

trade- offs (we can’t have everything)

• Strategy is making trade-offs in competing. Theessence of strategy is choosing what not to do.

Fitting activities together and

reinforcing one another • While operational effectiveness is about achieving

excellence in individual activities, or functions,strategy is about combining activities.

• Fit locks out imitators by creating a chain that isas strong as its strongest link

• Types of fit▫ Simple consistencies between activities▫ Activities are reinforcing▫ Optimization effect : Coordination and information

exchange across activities to eliminate redundancyand minimize wasted effort are the most basictypes of effort optimizations.

Fitting activities together and

reinforcing one another

• Competitive advantage grows out of the entiresystem of activities. The fit among activitiessubstantially reduces cost or increasesdifferentiation

• Problems of compete with strategic positionedorganization :

▫ Difficult to copy

▫ Difficult to face trade-offs

▫ Survival problems

▫ Difficult to identify interlocked activities and evenif identified difficult to replicate them

Fitting activities together and

reinforcing one another

• Strategy is creating fit among a company’sactivities. The success of a strategy depends ondoing many things well— not just a few—andintegrating among them.

Rediscovering strategies

• Threats to strategies:

▫ Change in technology

▫ Behavioral change of competition

▫ Internal problems (major)

• Some managers mistake “customer focus” tomean they must serve all customer needs orrespond to every request from distributionchannels. Others cite the desire to preserveflexibility.

• Cause of seduction towards OE

Rediscovering strategies

Operational Effectiveness Strategy building

Concrete and actionable Frightening trade-offs

Measureable performance Risk of blames on managers

Best industrial practices available Lack of vision and may cause customer loss.

•Growth trap•Among all other influences the desire to grow has perhapsthe most perverse effect on strategy. Trade-off and limitsappear to constrain growth. Serving one group of customersand excluding others, for instance, places a real or imaginelimit on revenue growth. Broadly targeted strategiesemphasizing low price result in lost sales with customerssensitive to features or service.

Rediscovering strategies Example : Maytag corporation

• Compromises and inconsistencies in the pursuit of growthwill erode the competitive advantage a company had with itsoriginal varieties or target customers. Attempts to compete inseveral ways at once create confusion and undermineorganizational motivation and focus.

• Profitable growth▫ The prescription is to concentrate on deepening a strategic

position rather than broadening and compromising it. Oneapproach is to look for extensions of the strategy that leveragethe existing activity system by offering features or services thatrivals would find impossible or costly to match on a stand-alonebasis. In other words, managers can ask themselves whichactivities, features, or forms of competition are feasible or lesscostly to them because of complementary activities that theircompany performs.

Rediscovering strategies

• Role of leadership

▫ Focus on creating distinctiveness

▫ Make tough decisions on trade-offs

▫ Define the company’s position

▫ Manage the entire system to create fit

▫ Focus on the long term

▫ Stewardship of corporate strategy