In his work, “What is Strategy”, Michael Porter propose a strong differentiation between Operational Effectiveness and Strategy.
Since, I plan to develop 2 articles based on this work, I feel the need to put a summary here so as to provide a background for the articles.
This article contains a summary of Porter’s work, with a lot of additional comments from me.
I try to preserve the content as much as possible, but i will also put my comments and thoughts into my own writing.
link to a selection of source for the article:
5 segments
Porter divides his work into 5 segments:
I. Operational Effectiveness is not strategy: When people talk about strategy they often mean Operational Effectiveness
II. Strategy Rests on Unique Activities: Activities as the basis component of Operational Effectiveness and Strategy
III. A Sustainable Strategic Position Requires Trade Offs: Trade offs allows Activities to play a strategic, not merely Operational Effectiveness role
IV. Fit Drives Both Competitive Advantage and Sustainability: Trade off implies a selection of activities, these activities forms a fit, an interrelation and interdependence among them that makes them stronger than the sum of each part (1+1=3)
V. Rediscovering Strategy: The organizational implication of operational effectiveness and strategy, and how to face the growth imperative when you need to have trade off’s
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I. Operational Effectiveness is not strategy:
Strategic Positioning and Operational Effectiveness
Porter argues that Positioning was and still is at the heart of strategy.
Yet competitive pressure, with companies pushing at all “productivity frontier”, makes positioning seem to place companies into a static place, where it cannot move and morph fast enough to keep up with the market.
Porter believe that this is a half truth. For him, the view that positioning is no longer relevant to strategy is the inability to differentiate between Operational Effectiveness (being excellent at your productivity frontier) and Strategy (choosing your productivity frontier, thus positioning yourself)
Both are essential to superior performance, since a company can outperform rivals only if it can establish a difference it can preserve
All difference between company arises from the activities that they do. A company that do invoicing more efficiently incurs lower cost, a company that create new solid product at faster pace gain market advantage, a company which approve a loan in a ridiculously bureaucratic manner will find that their losing their advantage.
It all comes down the activities that the company engage in.
Operational Effectiveness is achieving differentiation by doing similar activities better than competitors
Strategic Positioning is performing different activities than competitors or performing similar activities in a different ways
Operational Effectiveness is about pushing the productivity frontier
The goal of Operational Effectiveness is to arrive at or push the Productivity Frontier (all existing best practice at that point in time) for a set of activities
The Japanese is a strong example of the advantage coming from operational effectiveness, in the 1980’s they were so far ahead they could offer lower cost and superior quality at the same time.
Several advance helps companies in improving it’s Operational Effectiveness, pushing the productivity ever outward, increasing the bar for everyone, and eliminating illusion of trade offs that arise due to poor operational effectiveness (e.g. trade off between cost and quality)
These advances are:
1. Technology (miniaturization, automation, computing power, bandwidth)
2. Management approaches (TQM, time-based-competition, benchmarking, continuous improvement, empowerment, change management, learning organization)
Operational Effectiveness guarantees its own demise
Few companies can compete sustainably on operational effectiveness alone.
There are 3 reason:
1. The rapid diffusion of best practice. Consultants especially help the propagation of best practice, the best practice developed for 2 years in a company with the support of consultant, can than be sold and deployed in another company within 3 month. All those effort to push the productivity frontier, can then be copied by competitors
2. By raising the bar for everyone, operational effectiveness effectively benefit no company. There’s an absolute amount of improvement, but since all competitors can achieve similar level of improvement, the resulting productivity gains are transferred to customers, who grew accustomed to ever lower prices at higher quality and reliability.
3. The third reason is competitive convergence. The more benchmarking companies do, the more they become alike. If everyone is implementing best practice, what’s the meaning of best? As companies move on the productivity frontier, they discover similar path of improvement, and competition becomes a race down identical path that no one can win.
Continuous improvement has been etched on managers’ brains. But its tools unwittingly draw companies toward imitation and homogeneity. Gradually, managers let operational effectiveness supplant strategy, resulting in zero sum competition, static or declining prices, and price pressure that compromise companies ability to invest for the long term.
This demise brought 2 industry trend
1. Outsourcing.
There’s always a set of activities that all company must do, accounting, HR, IT. Outsourcing allows a centralization of these activities, achieving scale, resulting in cost and experience curve advantage.
Outsourcing is the fruit of pushing the productivity frontier for an activity that all company must do
2. Wave of consolidation through mergers.
Lacking strategic vision but facing performance pressure, companies resorted to buying thei rival, with the hope of achieving scale benefits.
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II. Strategy Rests on Unique Activities:
Competitive strategy is about being different. It means deliveratel choosing a different set of activities to deliver a unique mix of value.
Most managers describe strategic positioning in terms of their customers, but the essence of strategy is in the activities.
2 examples:
a. Southwest Airlines
tailors its activities to deliver low cost service. It does not offer meals, does not assigned seats, use automated ticketing, and have a standardized fleet of 737
b. Ikea
serves customers who trade service for cost, many are young and not wealthy. Uses a self service model, designs its modular ready-to-assemble furniture, displays every product in room-like settings, customers are expected to do their own pickup and delivery, provide in-store child care and opens extended hours.
3 source of strategic positions.
Strategic position like the two above example can come from three distinct, yet not mutually exclusive and often overlapping source:
1. Producing a subset of an Industry’s products or services (variety based positioning)
Jiffy Lube International, focuses on automotive lubricants and does not offer other car repair or maintenance services
2. Serving most or all the needs of a particular group of customers (needs- based positioning)
Bessemer Trust Company, configured its activities for personalized service, one account officer for 14 families; offers a wide array of customized services such as investment management, estate administration, oversight of oil and gas investment, and accounting for race horses and aircraft; loans are rarely needed by their clients
3. Segmenting customers who are accessible in different ways (access based positioning)
Carmike Cinemas, operaties movie theaters exclusively in cities and towns with populations under 200,000. It offers fewer screens and less sophisticated projection technology, only has a single theater manager for local admin. staff, has rock botttom corporate overhead.
Whatever the basis, positioning requires a tailored set of activities.
Having defined positioning, we can can start to define strategy.
Strategy is the creation of a unique and valuable position, involving a different set of activities
The essence of strategic positioning is to choose activities that are different from rivals.
If there were only one ideal position, there would be no need for strategy. Strategy allows companies to select their ground and take advantage of the terrain.
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III. A Sustainable Strategic Position Requires Trade Offs:
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Filed under: Business | Tagged: Business, Michael Porter, Strategy
