Whats Strategy

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What Is Strategy?
by Michael E. Porter

This article has benefited greatly from the assistance of many individuals and companies. The author gives special
thanks to Jan Rivkin, the coauthor of a related paper. Substantial research contributions have been made by Nicolaj
Siggelkow, Dawn Sylvester, and Lucia Marshall. Tarun Khanna, Roger Martin,and Anita McGahan have provided
especially extensive comments.

I. Operational Effectiveness Is Not Strategy
For almost two 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. Andthey must nurture a few core competencies in race to stay
ahead of rivals.
Positioning—once the heart of strategy—is rejected 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 best, temporary.
But those beliefs are dangerous half-truths, and they are leading more and morecompanies down the path 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 becoming leaner and more nimble. In many
industries, however, what some call hypercompetition is a self-inflicted wound, not the inevitable outcome of a
changing paradigm of competition.
Theroot of the problem is the failure to distinguish between operational effectiveness and strategy. 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, reengineering, change
management. Although the resulting operational improvements have oftenbeen dramatic, many companies have
been frustrated by their inability to translate those gains into sustainable profitability. And bit 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.

Operational Effectiveness: Necessary but Not Sufficient
Operationaleffectiveness and strategy are both essential to superior performance, which, after all, is the primary
goal of any enterprise. But they work in very different ways.
A company can outperform rivals only 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
thenfollows: 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 in cost 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 trainingemployees. Cost is generated by performing activities, and cost advantage arises from performing

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05.09.2009

What Is Strategy? - HBR.org

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particular activities more efficiently than competitors. Similarly, differentiation arises from both the choice of
activities and how they are performed. Activities, then arethe basic units of competitive advantage. Overall
advantage or disadvantage results from all a company’s activities, not only a few.1
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 of practices that allow a company to
better utilize its inputs by,...