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Presentation made on the article "What is Strategy" by Michael E.Porter ...

Presentation made on the article "What is Strategy" by Michael E.Porter

Compiled by: Rabbab Azhar

More in: Business
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  • 1. What Is Strategy? By Michael E. Porter 1
  • 2. 1. Operational Effectiveness is NOT Strategy • For almost 2 decades , managers have been learning to play by a new set of rules to respond to the competition. • The root of the problem is the failure to distinguish between operational effectiveness and strategy • Operational Effectiveness and strategy are both essential to superior performance BUT they work in very different ways 2
  • 3. • A company can out perform rivals only if it can establish a difference that it can preserve. • The difference between companies derive from several activities that are required to create, produce, sell and deliver their products or services Hence • Operational Effectiveness (OE) means performing similar activities better than rivals perform them • Strategic Positioning means performing different activities from rivals’ or performing similar activities in different ways 3
  • 4. Productivity Frontier • Productivity Frontier constitutes the sum of all High existing best practices at any Nonprice buyer value given time • It is constantly shifting outwards as new delivered technologies and management approaches are developed Low High Low • From the past decade managers have been Relative cost position preoccupied to keep up with the shifts in productivity 4 frontier
  • 5. • Operational Effectiveness (OE) is necessary to achieve superior profitability but not sufficient • Reasons: - Rapid diffusion of best practices - Competitive convergence • OE competition produces absolute improvement in OE but it leads to relative improvement for no one. • As rivals imitate one another’s improvements, strategies converge and there is a series of identical competition that no one can win • After a decade of impressive gains in OE , many companies are facing diminishing returns 5
  • 6. 2. Strategy Rests on Unique Activities 6
  • 7. • Competitive Strategy is about being different • Essence of strategy is in activities-choosing to perform activities differently or to perform different activities than rivals • Eminent example of SOUTHWEST AIRLINES 7
  • 8. Southwest Airlines • Southwest Airlines Company, offers short-haul, low-cost, point- to-point service between mid-size cities & secondary airports in large cities • Southwest’s frequent departures and low-fares attract price- sensitive and convenience-oriented travelers • Essence of strategy is in the activities and that’s what southwest focused on • It tailored all its activities to deliver low-cost , convenient service • It provided fast turnarounds, automated ticketing, did not offer meals, no assigned seats or premium classes of service, hence aligning all its activities to its thought out strategy; creating a unique and valuable strategic position 8
  • 9. The Origins of Strategic Positions • Strategic positions emerge from 3 distinct sources 1. Variety-based positioning--positioning based on producing a subset of an industry’s products or services • This positioning makes economic sense when a company can best produce particular products or services using distinctive sets of activities 9
  • 10. Variety-based Positioning -Example • Jiffy Lube International, specializes in automotive lubricants and does not offer other car repair or maintenance services • Its value chain produces faster service at lower cost compared to broader line repair shops • Its low cost and fast service attracts the customers so much so that the customers subdivide their purchases buying oil changes only from Jiffy Lube and other services from the competitors 10
  • 11. 2- Needs-based positioning—serving most or all the needs of a particular group of customers • Differences in needs will not translate into meaningful positions unless the best set of activities to satisfy them also differs 11
  • 12. Needs-based Positioning-Example Bessemer Trust Company Citibank Pvt. Ltd. Targets families with a Serves clients with a minimum minimum of $5 million assets of $250,000 Bessemer clients want capital Citibank's clients want preservation combined with convenient access to loans wealth accumulation. Loans are rarely needed One Account Officer is assigned Citibank’s account managers to provide all personalized are primarily lenders. For other services services, their account managers refer them to other Citibank Specialists Both Bessemer and Citibank have tailored their activities to meet the needs of a different group of private banking customers 12
  • 13. 3- Access-based positioning—segmenting customers who are accessible in different ways • Although the needs of the customers may be similar, the best configuration of activities to reach them is different 13
  • 14. Access-based Positioning-Example • Carmike Cinemas operates movie theaters exclusively in cities and towns with populations under 200,000 • How does Carmike make money in markets that are not only small but also wont support big-city ticket prices? • It does so through a set of activities that result in a lean cost structure • Positioning is not only about carving out a niche. A position emerging from any of the sources can be broad or narrow • Whatever the basis positioning requires a tailored set of activities because it is always a function of differences on the supply side; that is differences in activities 14
  • 15. • The essence of strategic positioning is to choose activities that are different from rivals’ Hence now we begin to answer the question “What is Strategy?” Strategy is the creation of a unique and valuable position, involving a different set of activities 15
  • 16. 3. A Sustainable Strategic Position Requires Trade-offs 16
  • 17. Unique Position & Ways of Imitation • Choosing a unique position is never enough to guarantee a sustainable advantage • A valuable position attracts imitation by competitors in the following two ways: – Repositioning itself to match the superior performer – Straddling by seeking to match the benefits of a successful position while maintaining the existing position 17
  • 18. The essence of strategy is choosing to perform activities differently than rivals do 18
  • 19. Strategic Trade-offs • A strategic position is not sustainable unless there are trade-offs with other existing positions • Trade-offs occur when activities are incompatible because more of one thing necessitates less of another • Trade-offs – create the need for choice – act as guard against repositioners and straddlers NEUTROGENA is a good example 19
  • 20. Neutrogena • Neutrogena Corp’s variety based positioning is based on a “kind to the skin” residue-free soap • The marketing strategy looks more like one of a drug company than a soap maker’s, as they: – advertise in medical journals – directly communicate with doctors – conduct research at their own Skincare Institute • In order to reinforce its positioning Neutrogena: – focused its distribution on drugstores – avoided price promotions 20
  • 21. Reasons of Neutrogena’s Success • While choosing this position Neutrogena – ignored deodorants and skin softeners that customers desire in soaps – gave up the large volume potential of selling through super markets and using price promotions – sacrificed manufacturing efficiencies to achieve the soap’s desired attributes • These were all the critical and valuable trade-offs that kept imitators away from Neutrogena Trade-offs create the need for choice along with protection against repositioners and straddlers 21
  • 22. • Trade-offs arise for three reasons: – from inconsistencies in image or reputation by delivering some other kind of value or even two inconsistent things at the same time – from activities itself as most of them reflect inflexibilities in machinery, people, or systems – from limits on internal co-ordination and control by clearly choosing and addressing to compete in one way AND NOT ANOTHER 22
  • 23. • Positioning trade-offs are pervasive in competition and essential to strategy • Trade-offs create need for choice and purposefully limit what the company offers • They deter straddling or repositioning as competitors undermine their own strategies and degrade the value of their own existing activities • E.g. Of Continental Airlines 23
  • 24. Continental Airlines Example • Continental Airlines saw how well Southwest Airlines was doing and decided to straddle by trying to match them on a number of point-to-point routes • A new service was dubbed in named Continental Lite with the following changes: – eliminated meals and first-class service – increased departure frequency – lowered fares – shortened turn-around time at the gate • While on the other hand Continental remained a full-service airline on other routes, continuing to use travel agents and its mixed fleet of planes along with the services of baggage checking etc. 24
  • 25. • All these trade-offs ultimately grounded Continental Lite • The imitation of Southwest’s strategy was a disaster that made Continental lose hundreds of millions of dollars, and the CEO his job • The reasons were: – planes were delayed leaving crowded hub cities – late flights and cancellations caused thousands of complaints daily – price competition was impossible with travel agent commissions and the agents were essential for the full-service business – frequent frustrated compromises on rewards and commissions of Continental’s full-service business were made but were of no use 25
  • 26. The result was simple: ANNOYED TRAVEL AGENTS AND ANGRY FULL-SERVICE CUSTOMERS 26
  • 27. Reasons of Continental Airline's Failure • Continental tried to compete in two ways at the same time with low cost on same routes and full service on others • The penalty for straddling had to be paid • With no trade-offs between the two positions, there was a chance that Continental might had succeeded Convincingly the absence of trade-offs is a dangerous half-truth that managers must unlearn 27
  • 28. False Trade-offs • False trade-offs between cost and quality occur due to: – Redundant or wasted effort – Poor control or accuracy – Weak co-ordination • Improvement of cost and differentiation is possible only when: – a company begins far behind the productivity frontier – the frontier shifts upward 28
  • 29. Returning to the question “What is Strategy?”, we see trade-offs add a new dimension to the answer • Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do • Without trade-offs there would be no need for choice and thus no need for strategy. Company will never achieve a sustainable advantage • Again, performance will wholly depend on operational effectiveness (OE) 29
  • 30. 4. Fit Drives Both Competitive Advantage and Sustainability 30
  • 31. • While OE is about achieving excellence in individual activities, strategy is about combining activities • Competitive advantage comes from the way activities fit and reinforce one another. E.g. Southwest Airlines • Fit locks out imitators by creating a chain that is as strong as its strongest link • Fit is important because discrete activities often affect one another • Most valuable fit is strategy-specific fit because it enhances a position’s uniqueness and amplifies trade- offs 31
  • 32. Types of Fit • There are 3 types of fit: 1. First-order fit ; simple consistency between each activity and the overall strategy 2. Second-order fit ; reinforcing activities (e.g. Neutrogena, a soap recommended by dermatologists, it markets to upscale hotels and in turn hotels grant their customary packaging to it. Neutrogena’s medical and hotel marketing activities reinforce one another, lowering total marketing costs) 3. Third-order fit ; optimization of effort 32
  • 33. • In all three types of fit, the whole matters more than any individual part • Competitive advantage grows out of the entire system of activities. • It is more useful to think in terms of themes that pervade many activities • These themes are embodied in nests of tightly linked activities 33
  • 34. Fit and Sustainability • Strategic fit is fundamental not only to competitive advantage but also to the sustainability of that advantage • The more a company’s positioning rests on activity systems the more difficult it is to untangle from outside the company and therefore hard to imitate • Fit among a company’s activities creates pressures and incentives to improve OE, which makes imitation even harder. 34
  • 35. • The most viable position s are those whose activity systems are incompatible because of tradeoffs • One implication is that strategic positions should have a horizon of a decade or more, not of a single planning cycle Completing the answer to the question “What is Strategy?” Strategy is creating fit among a company’s activities. The success of a strategy depends on doing many things well-not just a few-and integrating among them. If there is not fit among activities, there is no distinctive strategy and little sustainability 35
  • 36. 5. Rediscovering Strategy 36
  • 37. The Failure to Choose • Why do so many companies fail to have a strategy? Why do managers avoid making strategic choices? Why do managers so often let strategies decay or blur? • Commonly, threats to strategy are seen to emanate from outside a company • However a greater threat to strategy often comes from within 37
  • 38. • A sound strategy is undermined by : 1. a misguided view of competition 2. organizational failures 3. desire to grow 1- Managers have become confused about the necessity of making choices Unnerved by hyper competition, managers increase its likelihood by imitating everything about their competitor 2- OE is seductive and so caught up in the race for OE managers simply do not understand the need to have strategy 38
  • 39. Newly empowered employees ,often lack the vision of the whole and the perspective to recognize trade-offs 3- Trade-offs and limits appear to constrain growth and managers are constantly tempted to take incremental steps that surpass those limits but blur a company’s strategic position Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage a company had with its original varieties or target customers 39
  • 40. Maytag Corporation (Example) • Maytag’s success was based on its focus on reliable, durable washers and dryers , later extended to include dishwashers • Concerned with slow industry growth and competition from broad-line appliance makers, Maytag was pressured to extend its line • It expanded into refrigerators and cooking products • As a result the company soon faced a sharp decline in return on sales. Hence fell into the growth trap 40
  • 41. Profitable Growth • “What approaches to growth preserve and reinforce strategy?” • The answer lies in deepening a strategic position rather than broadening and compromising • Deepening a position involves making the company’s activities more distinctive, strengthening fit and communicating the strategy better to those customers who should value it • A company can often grow faster by better penetrating needs and varieties where it is distinctive than by slugging it out in higher growth arenas where company lacks uniqueness 41
  • 42. The Role of Leadership • The challenge of developing or reestablishing a clear strategy depends on leadership • Strong leaders willing to make choices are essential • Leader’s job is to teach others in the organization about strategy-and to say no • Setting limits is another function of leadership • Strategy requires constant discipline and clear communication which the leader should ensure 42
  • 43. • Conclusively, Managers must clearly distinguish operational effectiveness from strategy. Both are essential but the two agendas are different Operational Strategy Effectiveness Continual improvement Clear trade-offs everywhere; no trade-offs Constant change, Unique position and flexibility, and relentless strategic fit effort to achieve best practice Discipline and continuity 43
  • 44. 44