Strategy According To Michael Porter

[Magdalena Liendo]

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According to Porter, various management tools like total quality management, benchmarking, time-based competition, outsourcing, partnering, reengineering, that are used today, do enhance and dramatically improve the operational effectiveness of a company but fail to provide the company with sustainable profitability. Thus, the root cause of the problem seems to be failure of management to distinguish between operational effectiveness and strategy: Management tools have taken the place of strategy.

Operational Effectiveness: Performing similar activities better than rivals perform them. Operational effectiveness includes but is not limited to efficiency. It refers to many practices that allow a company to better utilize its inputs.

Porter states that a company can outperform rivals only if it can establish a difference it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both. However, Porter argues that most companies today compete on the basis of operational effectiveness. This concept of competition based on operational effectiveness is illustrated via the productivity frontier, depicted in the figure below.

The productivity frontier is the sum of all existing best practices at any given time or the maximum value that a company can create at a given cost, using the best available technologies, skills, management techniques, and purchased inputs. Thus, when a company improves its operational effectiveness, it moves toward the frontier. The frontier is constantly shifting outward as new technologies and management approaches are developed and as new inputs become available. To keep up with the continuous shifts in the productivity frontier, managers have adopted techniques like continuous improvement, empowerment, learning organization, etc. Although companies improve on multiple dimensions of performance at the same time as they move toward the frontier, most of them fail to compete successfully on the basis of operational effectiveness over an extended period. The reason for this being that competitors are quickly able to imitate best practices like management techniques, new technologies, input improvements, etc. Thus, competition based on operational effectiveness shifts the frontier outward and effectively raises the bar for everyone. But such competition only produces absolute improvement in operational effectiveness and no relative improvement for anyone.

"Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value" (p. 64). Moreover, the essence of strategy, according to Porter, is choosing to perform activities differently than rivals. Strategy is the creation of a unique and valuable position, involving a different set of activities.

2. Needs-based positioning: Serves most or all the needs of a particular group of customers. It is based on targeting a segment of customers. It arises when there are a group of customers with differing needs, and when a tailored set of activities can serve those needs best.

3. Access-based positioning: Segmenting customers who are accessible in different ways. Although their needs are similar to those of other customers, the best configuration of activities to reach them is different. Access can be a function of customer geography or customer scale or of anything that requires a different set of activities to reach customers in the best way.

Whatever the basis (variety, needs, access, or some combination of the three), positioning requires a tailored set of activities because it is always a function of differences in activities (or differences on the supply side). Positioning, moreover, is not always a function of difference on the demand (or customer) side. For instance, variety and access positionings do not rely on any customer differences.

1. A competitor can choose to reposition itself to match the superior performer.

2. A competitor can seek to match the benefits of a successful position while maintaining its existing position (known as straddling).

1. A company known for delivering one kind of value may lack credibility and confuse customers or undermine its own reputation by delivering another kind of value or attempting to deliver two inconsistent things at the same time.

2. Trade-offs arise from activities themselves. Different positions require different product configurations, different equipment, different employee behavior, different skills, and different management systems. In general, value is destroyed if an activity is over designed or under designed.

3. Trade-offs arise from limits on internal coordination and control. By choosing to compete in one way and not the other, management is making its organizational priorities clear. In contrast, companies that try to be all things to all customers, often risk confusion amongst its employees, who then attempt to make day-to-day operating decisions without a clear framework.

Moreover, trade-offs create the need for choice and protect against repositioners and straddlers. Thus, strategy can also be defined as making trade-offs in competing. The essence of strategy is choosing what not to do.

Positioning choices determine not only which activities a company will perform and how it will configure individual activities but also how activities relate to one another. While operational effectiveness focuses on individual activities, strategy concentrates on combining activities.

"Fit locks out imitators by creating a chain that is as strong as its strongest link" (p. 70). Fit, as per Porter, is the central component of competitive advantage because discrete activities often affect one another.

1. First-order fit: Simple consistency between each activity (function) and the overall strategy. Consistency ensures that the competitive advantages of activities cumulate and do not erode or cancel themselves out. Further, consistency makes it easier to communicate the strategy to customers, employees, and shareholders, and improves implementation through single-mindedness in the corporation.

3. Third-order fit: Goes beyond activity reinforcement to what Porter refers to as optimization of effort. Coordination and information exchange across activities to eliminate redundancy and minimize wasted effort are the most basic types of effort optimization.

In all three types of fit, the whole matters more than any individual part. Competitive advantage stems from the activities of the entire system. The fit among activities substantially reduces cost or increases differentiation. Moreover, according to Porter, companies should think in terms of themes that pervade many activities (i.e., low cost) instead of specifying individual strengths, core competencies or critical resources, as strengths cut across many functions, and one strength blends into others.

Additionally, fit among activities creates pressures and incentives to improve operational effectiveness, which makes imitation even harder. Fit means that poor performance in one activity will degrade the performance in others, so that weaknesses are exposed and more prone to get attention. On the other hand, improvements in one activity will "pay dividends in others" (p. 74).

Strategy is about choosing what to do as well as what not to do. Deciding which target group of customers, varieties, and needs the company should serve is fundamental to developing a strategy. Strategy is also however, in deciding not to serve other customers or needs and not to offer certain features or services. Thus, strategy requires continuous discipline and clear communication. Strategy should guide employees in making choices that arise because of trade-offs in their individual activities and in day-to-day decisions.

"Strategic continuity does not imply a static view of competition. A company must continually improve its operational effectiveness and actively try to shift the productivity frontier; at the same time, there needs to be ongoing effort to extend its uniqueness while strengthening the fit among its activities" (p. 78). However, a company may have to change its strategic position due to a major structural change in the industry. A company should choose its new position depending on its ability to find new trade-offs and leverage a new system of complementary activities into a sustainable advantage.

In the last 10 years or so, Porter added, companies have become increasingly confused about corporate goals. The only goal that makes sense is for companies to earn a superior return on invested capital because that is the only goal that aligns with economic value.

Geographic focus is another type of business definition that can trip up strategy. He gave the example of a U.S. lawn care company that developed a plan to grow through international expansion. The business, however, was not suited to operating on a global scale. The products were bulky and expensive to ship, and the company had to deal with different retail channels in different regions.

Enterprise Rent-A-Car is an example of a company that stumbled onto its strategy more or less by luck, according to Porter. The company started as an auto-leasing firm, but customers frequently asked if they could rent cars for short periods. The rental car industry was completely geared toward travelers, with pick-ups at airports and a price structure suited to expense accounts or vacationers willing to splurge.

It is difficult to sustain the kind of strategic advantage Enterprise enjoys without a patent, Porter pointed out. Hertz has tried to connect with this business but remains geared toward the traveler and cannot compete with Enterprise in its specific market.

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