What is Strategy

An explanation about the various dimensions to formulating strategy

General Misconceptions about Strategy

• Positioning- too static for today’s dynamic market

• Competitive advantage is at best temporary• Operational effectiveness can sustain

profitability• Management tools can replace strategy

Operational Effectiveness

• Value creation by incurring cost• Activities generate cost• Cost advantage by performing activities

efficiently• Differentiation arises from the choice of

activities and how they are performed leading to Competitive advantage

Productivity Frontier• Productivity frontier –

maximum value that a company can create at a particular cost

• Operational effectiveness increases- company moves towards the PF

• PF moves outwards with new technology and management practices

Why to look beyond Operational Effectiveness

?

• Rapid diffusion of best practices- Imitate management techniques

• Competition produces absolute improvement in OE but relative improvement for no one

• Competitive convergence• OE Competition alone is mutually destructive

(result M&A)

Japanese Dilemma

STRATEGY RESTS ON UNIQUE ACTIVITIES

The Southwest Airlines :short-haul, low-cost, point-to-point service, does not offer meals, assigned seats, interline baggage checking, or premium classes of service, automated ticketing at the gate

• Thus Competitive Strategy is deliberately choosing a different set of activities to deliver a unique mix of values

• Choice of a specific set of activities leads to strategic positions

• Ikea furniture

Strategic Positions

• Variety-based positioning – choice of products/services

• Need-based positioning- choice of a segment of customers

• Access- based positioning – choice of ways to reach customers

Strategic position - Difficulties

• Imitation1. Competitors reposition to match superior

performer2. Straddler- Retain existing position AND seek to

match benefits of a successful positionBUT !!!

• Continental Airlines

Hence Trade Offs

Neutrogena

Reasons for Trade offs

• Consistency in image or reputation• Different positions require different set of

activities• Limits on internal coordination and control

• Improve operational effectiveness• Eliminating trade offs is a good thing• But if there are no trade offs companies will

never achieve a sustainable advantge

Importance of Fit

• Strategy is about combining activities• Competitive advantage comes from the way

activities fit and reinforce one another• Fit locks out imitators by creating a chain that

is as strong as its strongest link.

Types of Fit

• First order fit – simple consistency between each activity

• Activities not erode each other• Makes it easier to communicate to customers• Improves implementation through single mindedness

• Second order fit – activities are reinforcing• Third order fit – optimization of effort

• Coordination to eliminate redundancy and wasted effort

• The whole matters more than the individual parts

• Competitive advantage grows out of the entire system of activities

• Fit leads to sustainability• Probability that competitors can match an existing

activity is less than 1 which gets compounded with each activity thus making it difficult to imitate the entire system

• Fit among company’s activities creates pressure and incentives to improve operational effectiveness

Viable Positions

• SP - Should have a horizon of a decade•Improvement in individual activities•Fit across various activities•Allows organization builds unique capabilities

Why companies Fail to have a strategy?

• Failure to choose• Conventional wisdom within an industry• “Customer focus”• Organizational realities – fear of making a bad

choice• GROWTH Trap

• Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage to a company

• the growth imperative is hazardous to strategy

Profitable Growth

• Seek activities, features, or forms of competition that are feasible or less costly to them because of complementary activities that their company performs

• company can often grow faster-and far more profitably- by better penetrating needs and varieties where it is distinctive

• Globalization often allows growth that is consistent with strategy

Role of Leadership

• Clear strategy depends on leadership • Make a clear choice• decide which industry changes and customer

needs the company will respond to, while avoiding organizational distractions and maintaining the company's distinctiveness

• Teach others of organization about strategy

Take Away