What Is The Strategy?

NOVEMBER-DECEMBER 1996

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I. Operational Effectiveness Is Not Strategy
For almost tv^fo decades, managers have been learning to play by a new set of rules. Companies must be flexible to respond rapidly to competitive and market changes. They must benchmark continuously to achieve best practice. They must outsource aggressively to gain efficiencies. And they must nurture a few coreeompetencies in the by Michael race to stay ahead of rivals. Positioning-once the heart of strategy-is reject- ! ed as too static for today's dynamic markets and changing technologies. According to the new dogma, rivals can quickly copy any market position, and competitive advantage is, at hest, temporary. But those beliefs are dangerous half-truths, and they are leading more and more companies down thepath of mutually destructive competition. True, some barriers to competition are falling as regulation eases and markets become global. True, companies have properly invested energy in beeoming leaner and more nimble. In many industries, however, what some call hypcrcompetition is a self-inflicted wound, not the inevitahle outcome of a changing paradigm of competition. The root of the problem isthe failure to distinguish between operational effeetiveness and stratHARVARD BUSINESS REVIEW N,)vt;mbt;r-D(.ct;mbi;r 1996

What Is Strategy r

egy. The quest for productivity, quality, and speed has spawned a remarkable number of management tools and techniques: total quality management, benchmarking, time-based competition, outsourcing, partnering, rcungineer'ing, change management. Althoughthe resulting operational improvements have often E. Porter ^^^^ dramatic, many companies have been frustrated hy their inability to translate those gains into sustainahle profitahility. And hit by bit, almost imperceptibly, management tools have taken the place of strategy. As managers push to improve on all fronts, they move farther away from viable competitive positions.

OperationalEffectiveness: Necessary but Not Sufficient
Operational effectiveness and strategy are both essential to superior performance, wbich, after all, is the primary goal of any enterprise. But they work in very different ways.
Michael E. Porter is the C. Roland Chiistensen Professor of Business Adminislralion at the Harvard Business School in Boston, Massachusetts.

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A company can outperform rivalsonly if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both. The arithmetic of superior profitability then follows: delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average unit costs. Ultimately, all differences between companies incost or price derive from the hundreds of activities required to create, produce, sell, and deliver their products or services, such as calling on customers, assembling final products, and training employees. Cost is generated by performing activities, and cost advantage arises from performing particular activities more efficiently than competitors. Similarly, differentiation arises from both thechoice of activities and how they are performed. Activities, then, are the hasic units of competitive advantage. Overall advantage or disadvantage results from all a company's activities, not only a few.' Operational effectiveness (OE) means performing similar activities better than rivals perform them. Operational effectiveness includes but is not limited to efficiency. It refers to any number ofpractices that allow a company to better utilize its inputs by, for example, reducing defects in products or developing better products faster. In contrast, strategic positioning means performing different activities from rivals' or performing similar activities in different ways.

Operational Effectiveness Versus Strategic Positioning
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Relative cost position

Differences in...