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What Is Strategy?
by Michael E. Porter

Included with this full-text Harvard Business Review article:
1 Article Summary
The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work
2 What Is Strategy?
21 Further Reading
A list of related materials, with annotations to guide further
exploration of the article’s ideas and applications

Reprint 96608What Is Strategy?

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The Idea in Brief

The Idea in Practice

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 withfewer inputs and
defec ts—than rivals. Companies can reap
enormous advantages from operational effectiveness, as Japanese 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
industryadopt them, the productivity
frontier—the maximum value a company
can deliver at a given cost, given the best
available technology, 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 companiesdo, the more competitive convergence
you have—that is, the more indistinguishable companies are from one another.

Three key principles underlie strategic positioning.

Strategic positioning 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 indifferent ways.

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 anarrow market (Carmike Cinemas operates only in cities with a population
under 200,000)
2. Strategy requires you to make trade-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 todo with the
ways a company’s activities interact and reinforce one another. For example, Vanguard
Group aligns all of its activities with a low-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. WhenContinental Lite tried to match a
few of Southwest Airlines’ activities, but not
the whole interlocking system, the results
were disastrous.
Employees need guidance 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...