What is Strategy - article by Michael Porter - blog by Karl Janowski
“Strategy is the creation of a unique and valuable position, involving a different set of activities (from your competitors)”
“The essence of strategy is choosing to perform activities differently than rivals do”Operational Effectiveness – performing similar tasks better than your competitors
Strategy – performing different tasks or similar activities in different ways than your competitors
Main Strategies
Generic Strategies: Low Cost Leadership, Differentiation, Large or Small Segment Focus
More Detailed Versions of Generic
- Variety-based positioning – producing a subset of products or services (Jiffy Lube oil only), does not rely on customer preferences
- Needs-based positioning – targeting a segment of customers (Ikea – all home furnishings for customers) ), does not rely on customer preferences
- Access-based positioning – targeting customers who need different activities to reach them
Porter’s Five Market Forces
- Threat of new Entry
- Intensity of rivalry among existing market
- Pressure from substitute products
- Bargaining power of buyers
- Bargaining power of suppliers
*Many people add that government is the sixth force
Productivity Frontier – a curve of buyer value (Y axis from low to high) versus cost position (X axis from high to low)
Because of rapid diffusion of best practices operational effectives does not span the test of time. It is not a strategy!
| | | Player 2 | |
| | | MAKE Product | Outsource |
Player 1 | MAKE Product | MM | MO |
Outsource | OM | OO | |
I like to think of this in Game Theory terms. If there are two companies and both have the decision to make or outsource Product X. If they both choose to make Product X themselves then the only advantage Player 1 can gain is to be more operationally effective than Player 2. Similarly if both outsource the one that finds the best partner wins. In both of these cases it is operational effectiveness (which is easier to copy) rather than strategy that determines the outcome of the competition (in game theory this would be clear by the payout).
Two Types of Imitators- Reposititioners – move to a new position
- Straddlers – hold same position but change to match benefits
Tradeoffs prevent imitation by creating the need for choice between two positions
Tradeoffs Occur for Three Reasons
- Reputation and Image
- Activities themselves
- Limits on internal coordination and control
Quality versus Cost tradeoff is only false when you are behind on the productivity frontier or the frontier shifts outward
“Strategy is making tradeoffs in competing”
“Strategy is choosing what not to do” - Without tradeoffs you could hold all positions at the same time. Tradeoffs therefore dictate strategy
Strategy fitness – all tradeoffs support the same position, activities support each other, lists like “core competencies”, “critical resources” and “key success factors” normally go against fitness
Three Types of Strategy Fitness
- Simple Consistency – among activities (e.g. all are aligned on low cost strategy)
- Reinforcing Activities – activities make the other activities stronger
- Optimization of effort –
“Strategy is creating fitness across a company’s activities”
What Prevents a Sound Strategy, (decreases fitness)
- Misguided View of competition
- Organizational Failures
- Desire to grow – forces broadening of position over deepening it
Many go after operational effectiveness because it is tangible and measurable
Extend your uniqueness