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What Is Strategy?

The Idea in Brief
The myriad activities that go into creating, producing, selling, and delivering a product or service are the basic units of competitive advantage. Operational effectiveness means performing these activities better— that is, faster, or with fewer inputs and defects—than rivals. Companies can reap enormous advantages from operational effectiveness, asJapanese firms demonstrated in the 1970s and 1980s with such practices as total quality management and continuous improvement. But from a competitive standpoint, the problem with operational effectiveness is that best practices are easily emulated. As all competitors in an industry adopt them, the productivity frontier—the maximum value a company can deliver at a given cost, given the best availabletechnology, skills, and management techniques—shifts outward, lowering costs and improving value at the same time. Such competition produces absolute improvement in operational effectiveness, but relative improvement for no one. And the more benchmarking that companies do, the more competitive convergence you have—that is, the more indistinguishable companies are from one another. Strategicpositioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. It means performing different activities from rivals, or performing similar activities in different ways.

The Idea in Practice
Three key principles underlie strategic positioning. 1. Strategy is the creation of a unique and valuable position, involving a different set of activities.Strategic position emerges from three distinct sources: • serving few needs of many customers (Jiffy Lube provides only auto lubricants) • serving broad needs of few customers (Bessemer Trust targets only very highwealth clients) • serving broad needs of many customers in a narrow market (Carmike Cinemas operates only in cities with a population under 200,000) 2. Strategy requires you to maketrade-offs in competing—to choose what not to do. Some competitive activities are incompatible; thus, gains in one area can be achieved only at the expense of another area. For example, Neutrogena soap is positioned more as a medicinal product than as a cleansing agent. The company says “no” to sales based on deodorizing, gives up large volume, and sacrifices manufacturing efficiencies. By contrast,Maytag’s decision to extend its product line and acquire other brands represented a failure to make difficult trade-offs: the boost in revenues came at the expense of return on sales. 3. Strategy involves creating “fit” among a company’s activities. Fit has to do with the ways a company’s activities interact and reinforce one another. For example, Vanguard Group aligns all of its activities with alow-cost strategy; it distributes funds directly to consumers and minimizes portfolio turnover. Fit drives both competitive advantage and sustainability: when activities mutually reinforce each other, competitors can’t easily imitate them. When Continental Lite tried to match a few of Southwest Airlines’ activities, but not the whole interlocking system, the results were disastrous. Employees needguidance about how to deepen a strategic position rather than broaden or compromise it. About how to extend the company’s uniqueness while strengthening the fit among its activities. This work of deciding which target group of customers and needs to serve requires discipline, the ability to set limits, and forthright communication. Clearly, strategy and leadership are inextricably linked.

COPYRIGHT ©2000 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

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What Is Strategy?
by Michael E. Porter

I. Operational Effectiveness Is Not Strategy
COPYRIGHT © 1996 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

For almost two decades, managers have been learning to play by a new set of rules. Companies must be flexible to respond rapidly...
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