Presentation made on the article "What is Strategy" by Michael E.Porter Compiled by: Rabbab Azhar

1. What Is Strategy?
By Michael E. Porter
1

2. 1. Operational Effectiveness is
NOT Strategy
• For almost 2 decades , managers have been learning to
play by a new set of rules to respond to the
competition.
• The root of the problem is the failure to distinguish
between operational effectiveness and strategy
• Operational Effectiveness and strategy are both
essential to superior performance BUT they work in
very different ways
2

3. • A company can out perform rivals only if it can
establish a difference that it can preserve.
• The difference between companies derive from several
activities that are required to create, produce, sell and
deliver their products or services
Hence
• Operational Effectiveness (OE) means performing
similar activities better than rivals perform them
• Strategic Positioning means performing different
activities from rivals’ or performing similar activities
in different ways
3

4. Productivity Frontier
• Productivity Frontier
constitutes the sum of all High
existing best practices at any
Nonprice buyer value
given time
• It is constantly shifting
outwards as new
delivered
technologies and
management approaches are
developed
Low
High Low
• From the past decade
managers have been Relative cost position
preoccupied to keep up with
the shifts in productivity
4
frontier

5. • Operational Effectiveness (OE) is necessary to achieve superior
profitability but not sufficient
• Reasons:
- Rapid diffusion of best practices
- Competitive convergence
• OE competition produces absolute improvement in OE but it
leads to relative improvement for no one.
• As rivals imitate one another’s improvements, strategies converge
and there is a series of identical competition that no one can win
• After a decade of impressive gains in OE , many companies are
facing diminishing returns
5

6. 2. Strategy Rests
on
Unique Activities
6

7. • Competitive Strategy is about being different
• Essence of strategy is in activities-choosing to perform
activities differently or to perform different activities
than rivals
• Eminent example of SOUTHWEST AIRLINES
7

8. Southwest Airlines
• Southwest Airlines Company, offers short-haul, low-cost, point-
to-point service between mid-size cities & secondary airports in
large cities
• Southwest’s frequent departures and low-fares attract price-
sensitive and convenience-oriented travelers
• Essence of strategy is in the activities and that’s what southwest
focused on
• It tailored all its activities to deliver low-cost , convenient service
• It provided fast turnarounds, automated ticketing, did not offer
meals, no assigned seats or premium classes of service, hence
aligning all its activities to its thought out strategy; creating a
unique and valuable strategic position 8

9. The Origins of Strategic Positions
• Strategic positions emerge from 3 distinct sources
1. Variety-based positioning--positioning based on
producing a subset of an industry’s products or
services
• This positioning makes economic sense when a
company can best produce particular products or
services using distinctive sets of activities
9

10. Variety-based Positioning -Example
• Jiffy Lube International, specializes in automotive
lubricants and does not offer other car repair or
maintenance services
• Its value chain produces faster service at lower cost
compared to broader line repair shops
• Its low cost and fast service attracts the customers
so much so that the customers subdivide their
purchases buying oil changes only from Jiffy Lube
and other services from the competitors
10

11. 2- Needs-based positioning—serving
most or all the needs of a particular
group of customers
• Differences in needs will not translate
into meaningful positions unless the
best set of activities to satisfy them
also differs
11

12. Needs-based Positioning-Example
Bessemer Trust Company Citibank Pvt. Ltd.
Targets families with a Serves clients with a minimum
minimum of $5 million assets of $250,000
Bessemer clients want capital Citibank's clients want
preservation combined with convenient access to loans
wealth accumulation. Loans are
rarely needed
One Account Officer is assigned Citibank’s account managers
to provide all personalized are primarily lenders. For other
services services, their account managers
refer them to other Citibank
Specialists
Both Bessemer and Citibank have tailored their activities to meet the
needs of a different group of private banking customers 12

13. 3- Access-based positioning—segmenting
customers who are accessible in
different ways
• Although the needs of the customers
may be similar, the best configuration of
activities to reach them is different
13

14. Access-based Positioning-Example
• Carmike Cinemas operates movie theaters exclusively in cities
and towns with populations under 200,000
• How does Carmike make money in markets that are not only
small but also wont support big-city ticket prices?
• It does so through a set of activities that result in a lean cost
structure
• Positioning is not only about carving out a niche. A position
emerging from any of the sources can be broad or narrow
• Whatever the basis positioning requires a tailored set of
activities because it is always a function of differences on the
supply side; that is differences in activities
14

15. • The essence of strategic positioning is to choose
activities that are different from rivals’
Hence now we begin to answer the question
“What is Strategy?”
Strategy is the creation of a unique and valuable
position, involving a different set of activities
15

16. 3. A Sustainable Strategic
Position Requires Trade-offs
16

17. Unique Position & Ways of Imitation
• Choosing a unique position is never enough to
guarantee a sustainable advantage
• A valuable position attracts imitation by competitors
in the following two ways:
– Repositioning itself to match the superior performer
– Straddling by seeking to match the benefits of a successful
position while maintaining the existing position
17

18. The essence of strategy is choosing to perform
activities differently than rivals do
18

19. Strategic Trade-offs
• A strategic position is not sustainable unless there
are trade-offs with other existing positions
• Trade-offs occur when activities are incompatible
because more of one thing necessitates less of
another
• Trade-offs
– create the need for choice
– act as guard against repositioners and straddlers
NEUTROGENA is a good example 19

20. Neutrogena
• Neutrogena Corp’s variety based positioning is
based on a “kind to the skin” residue-free soap
• The marketing strategy looks more like one of a
drug company than a soap maker’s, as they:
– advertise in medical journals
– directly communicate with doctors
– conduct research at their own Skincare Institute
• In order to reinforce its positioning Neutrogena:
– focused its distribution on drugstores
– avoided price promotions
20

21. Reasons of Neutrogena’s Success
• While choosing this position Neutrogena
– ignored deodorants and skin softeners that customers
desire in soaps
– gave up the large volume potential of selling through
super markets and using price promotions
– sacrificed manufacturing efficiencies to achieve the soap’s
desired attributes
• These were all the critical and valuable trade-offs
that kept imitators away from Neutrogena
Trade-offs create the need for choice along with
protection against repositioners and straddlers
21

22. • Trade-offs arise for three reasons:
– from inconsistencies in image or reputation by delivering
some other kind of value or even two inconsistent things
at the same time
– from activities itself as most of them reflect inflexibilities
in machinery, people, or systems
– from limits on internal co-ordination and control by
clearly choosing and addressing to compete in one way
AND NOT ANOTHER
22

23. • Positioning trade-offs are pervasive in competition
and essential to strategy
• Trade-offs create need for choice and purposefully
limit what the company offers
• They deter straddling or repositioning as
competitors undermine their own strategies and
degrade the value of their own existing activities
• E.g. Of Continental Airlines
23

24. Continental Airlines Example
• Continental Airlines saw how well Southwest Airlines was
doing and decided to straddle by trying to match them on a
number of point-to-point routes
• A new service was dubbed in named Continental Lite with
the following changes:
– eliminated meals and first-class service
– increased departure frequency
– lowered fares
– shortened turn-around time at the gate
• While on the other hand Continental remained a full-service
airline on other routes, continuing to use travel agents and its
mixed fleet of planes along with the services of baggage
checking etc. 24

25. • All these trade-offs ultimately grounded Continental Lite
• The imitation of Southwest’s strategy was a disaster that made
Continental lose hundreds of millions of dollars, and the CEO
his job
• The reasons were:
– planes were delayed leaving crowded hub cities
– late flights and cancellations caused thousands of complaints
daily
– price competition was impossible with travel agent
commissions and the agents were essential for the full-service
business
– frequent frustrated compromises on rewards and
commissions of Continental’s full-service business were
made but were of no use
25

26. The result was simple:
ANNOYED TRAVEL AGENTS
AND ANGRY FULL-SERVICE
CUSTOMERS
26

27. Reasons of Continental Airline's Failure
• Continental tried to compete in two ways at the
same time with low cost on same routes and full
service on others
• The penalty for straddling had to be paid
• With no trade-offs between the two positions, there
was a chance that Continental might had succeeded
Convincingly the absence of trade-offs is a dangerous
half-truth that managers must unlearn
27

28. False Trade-offs
• False trade-offs between cost and quality occur due
to:
– Redundant or wasted effort
– Poor control or accuracy
– Weak co-ordination
• Improvement of cost and differentiation is possible
only when:
– a company begins far behind the productivity
frontier
– the frontier shifts upward
28

29. Returning to the question “What is Strategy?”, we see
trade-offs add a new dimension to the answer
• Strategy is making trade-offs in competing. The
essence of strategy is choosing what not to do
• Without trade-offs there would be no need for
choice and thus no need for strategy. Company will
never achieve a sustainable advantage
• Again, performance will wholly depend on
operational effectiveness (OE)
29

30. 4. Fit Drives Both Competitive
Advantage and Sustainability
30

31. • While OE is about achieving excellence in individual
activities, strategy is about combining activities
• Competitive advantage comes from the way activities
fit and reinforce one another. E.g. Southwest Airlines
• Fit locks out imitators by creating a chain that is as
strong as its strongest link
• Fit is important because discrete activities often affect
one another
• Most valuable fit is strategy-specific fit because it
enhances a position’s uniqueness and amplifies trade-
offs 31

32. Types of Fit
• There are 3 types of fit:
1. First-order fit ; simple consistency between each activity
and the overall strategy
2. Second-order fit ; reinforcing activities (e.g. Neutrogena, a
soap recommended by dermatologists, it markets to upscale
hotels and in turn hotels grant their customary packaging to
it. Neutrogena’s medical and hotel marketing activities
reinforce one another, lowering total marketing costs)
3. Third-order fit ; optimization of effort
32

33. • In all three types of fit, the whole matters more than any
individual part
• Competitive advantage grows out of the entire system of
activities.
• It is more useful to think in terms of themes that
pervade many activities
• These themes are embodied in nests of tightly linked
activities
33

34. Fit and Sustainability
• Strategic fit is fundamental not only to competitive
advantage but also to the sustainability of that
advantage
• The more a company’s positioning rests on activity
systems the more difficult it is to untangle from
outside the company and therefore hard to imitate
• Fit among a company’s activities creates pressures
and incentives to improve OE, which makes
imitation even harder.
34

35. • The most viable position s are those whose activity
systems are incompatible because of tradeoffs
• One implication is that strategic positions should
have a horizon of a decade or more, not of a single
planning cycle
Completing the answer to the question
“What is Strategy?”
Strategy is creating fit among a company’s activities.
The success of a strategy depends on doing many
things well-not just a few-and integrating among
them. If there is not fit among activities, there is no
distinctive strategy and little sustainability 35

36. 5. Rediscovering Strategy
36

37. The Failure to Choose
• Why do so many companies fail to have a strategy?
Why do managers avoid making strategic choices?
Why do managers so often let strategies decay or blur?
• Commonly, threats to strategy are seen to emanate
from outside a company
• However a greater threat to strategy often comes from
within
37

38. • A sound strategy is undermined by :
1. a misguided view of competition
2. organizational failures
3. desire to grow
1- Managers have become confused about the necessity
of making choices
Unnerved by hyper competition, managers increase its
likelihood by imitating everything about their
competitor
2- OE is seductive and so caught up in the race for OE
managers simply do not understand the need to have
strategy
38

39. Newly empowered employees ,often lack the vision of
the whole and the perspective to recognize trade-offs
3- Trade-offs and limits appear to constrain growth and
managers are constantly tempted to take incremental
steps that surpass those limits but blur a company’s
strategic position
Compromises and inconsistencies in the pursuit of
growth will erode the competitive advantage a
company had with its original varieties or target
customers
39

40. Maytag Corporation (Example)
• Maytag’s success was based on its focus on reliable,
durable washers and dryers , later extended to
include dishwashers
• Concerned with slow industry growth and
competition from broad-line appliance makers,
Maytag was pressured to extend its line
• It expanded into refrigerators and cooking products
• As a result the company soon faced a sharp decline
in return on sales. Hence fell into the growth trap
40

41. Profitable Growth
• “What approaches to growth preserve and reinforce strategy?”
• The answer lies in deepening a strategic position rather than
broadening and compromising
• Deepening a position involves making the company’s activities
more distinctive, strengthening fit and communicating the
strategy better to those customers who should value it
• A company can often grow faster by better penetrating needs and
varieties where it is distinctive than by slugging it out in higher
growth arenas where company lacks uniqueness
41

42. The Role of Leadership
• The challenge of developing or reestablishing a clear
strategy depends on leadership
• Strong leaders willing to make choices are essential
• Leader’s job is to teach others in the organization
about strategy-and to say no
• Setting limits is another function of leadership
• Strategy requires constant discipline and clear
communication which the leader should ensure
42

43. • Conclusively, Managers must clearly distinguish
operational effectiveness from strategy. Both are
essential but the two agendas are different
Operational Strategy
Effectiveness
Continual improvement Clear trade-offs
everywhere; no trade-offs
Constant change, Unique position and
flexibility, and relentless strategic fit
effort to achieve best
practice
Discipline and continuity
43

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