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M ichael porter strategy is not operational effectiveness
This document discusses the differences between operational effectiveness and strategy. It argues that while operational effectiveness like lowering costs or increasing productivity is important, it does not constitute a strategy. A strategy involves performing activities differently than competitors or performing different activities to develop a unique competitive position. Relying solely on operational effectiveness can only provide a temporary advantage as competitors will catch up. To achieve a sustainable competitive advantage, a company needs both a strong strategy to be distinct in the market as well as excellent operational effectiveness.
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M ichael porter strategy is not operational effectiveness
- 1. Michael Porter -Strategy is Not Operational Effectiveness By Dr. Michael McDermott mcdermottm1@nku.edu
- 2. Structure 1. Common mistakesin discussing strategy 2. The Limited Advantages of Being Better – Operational Effectiveness 3. The Significant Advantages of Being Smarter – Genuine Strategy 4. Smarter can beat Better 5. The Critical and Sustainable Advantages of Being Better and Smarter – Operational Effectiveness and Genuine Strategy 6. Smarter and Better is Invincible © McDermott, 2014. 2
- 3. Common mistakes indiscussing strategy • Many people, including executives, often make the mistake of equating operational effectiveness with strategy: • Strategy is not: – transferring production to a lower cost location; or, – Increasing productivity; or, – Lowering costs • Improving operational effectiveness is great, but it’s not strategy © McDermott, 2014. 3
- 4. What is OperationalEffectiveness (OE)? • It’s all about internal performance • It’s about being: – Better, or – Cheaper, or – Faster, or – Wider (i.e. more international) © McDermott, 2014. 4
- 5. Nature and Limitationsof Operational Effectiveness Nature of OE Implications • OE means performing similar activities better than rivals perform them • Constant improvement or getting better is seldom sufficient for profitability • Constant improvement in operational effectiveness is necessary to achieve superior profitability. • And that is tough – hence many companies exit an industry where they have exhausted all possibilities © McDermott, 2014. 5
- 6. Operational Effectiveness Constant improvement Being Better ©McDermott, 2014. 6
- 7. Operational Effectiveness Law of Diminishing Returnsand Others Narrow Gap Constant Improvement For example, the success of many Japanese companies was based upon being better and cheaper. But you can see that they are seeing their advantage eroded (i.e. South Koreans) © McDermott, 2014. 7
- 8. Nature and Limitationsof Operational Effectiveness Nature of OE Limitations of OE • OE means performing similar activities better than rivals perform them • Constant improvement or getting better is seldom sufficient for profitability • Constant improvement in operational effectiveness is necessary to achieve superior profitability. • And that is tough – hence many companies exit an industry where they have exhausted all possibilities © McDermott, 2014. 8
- 9. The Limitations ofOE • Those who rely exclusively upon OE are quickly overtaken • Just think of the TV, PC industries – Japanese topple US and Europeans – South Koreans/Taiwanese topple US and Japanese – Will Chinese topple South Korean and Taiwanese? © McDermott, 2014. 9
- 10. Operational Effectiveness ExplainsInitial Success of Asian Companies 1960s-80s Japanese companies are winners 1990s-2010s South Korean companies are winners © McDermott, 2014. 2020sChinese companies are winners 10
- 11. Operational Effectiveness MayDeliver Advantage Briefly Being Better Operational Effectiveness © McDermott, 2014. 11
- 12. Operational Effectiveness MayDeliver Advantage Briefly Temporary Competitive Advantage Operational Effectiveness © McDermott, 2014. 12
- 13. Running out ofsteam: the limitations of OE • Companies that are copycats simply exploiting differences in operational efficiency soon come undone; • Once gaps in OE narrow, such companies struggle; • Because they lack a distinct competitive position. • In short, they need to learn strategy! • In Porter’s terms they need to develop a unique competitive position © McDermott, 2014. 13
- 14. Japanese Winners inthe Past According to Porter, since they were better, they did not need to be smarter © McDermott, 2014. 14
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- 16. Surely they weremore than just Better? • In the 1980s-1990s, Sony was “the Apple” of today. • Surely it was “smarter”, rather than just better? • What’s the difference between Sony then and Apple today? • Both made great products that are “better”, but Apple realized that its focus needs to be the consumer experience not simply the products. • Apple’s success may reflect a total customer-centric business model – that is “smarter”; • Sony’s focus was, and appears to remain, simply offering “better” products. © McDermott, 2014. 16
- 17. Future Japanese WinnersMust Also Be Smarter Do they have genuine strategy? © McDermott, 2014. 17
- 18. The Porter “Doctrine”:Genuine Strategy and Operational Effectiveness Deliver Enduring Competitive Advantage 2013 Rita McGrath book is The End of Competitive Advantage Genuine Strategy Operational Effectiveness Sustainable Competitive Advantage I am not sure that any competitive advantage is sustainable © McDermott, 2014. 18
- 19. Genuine Strategy andOE Both are essential for superior performance Excellence in one is not enough for enduring success or competitive advantage © McDermott, 2014. 19
- 20. Establishing Competitive Advantage 1 2 •Deliver greater value to customers; • Kroger, Meijer, Netflix, Nike, Under Armor • Create comparable value at lower prices; • Coinstar, Dell, Samsung, Vizio • Do both 3 © McDermott, 2014. 20
- 21. Creating Competitive Advantage: Effectivenessvs Efficient More Effective More Efficient • Leads to greater valuecreation • Higher unit prices • Apple, BMW • Leads to Lower unit costs • Can offer lowest prices • Costco, Lenovo © McDermott, 2014. 21
- 22. Creating Competitive Advantage: Effectivenessvs Efficient More Effective More Efficient • Results in differentiation competitive advantage • Results in lowest cost competitive advantage © McDermott, 2014. 22
- 23. OE and Buyers •Continuous improvements in OE proves of enormous benefits to buyers; – Today we can buy a USB stick at Wal-mart for less than $5 that has more memory than a computer that cost $000s in the 1980s; • But this is a nightmare scenario for companies that are sucked into damaging price wars; – Who makes a profit as a PC producer today? © McDermott, 2014. 23
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- 25. Examples of StrategicallySmart The Smarts The Laggards • Tend to be ‘different’ • Are innovative • Imitate and emulate their national rivals © McDermott, 2014. 25
- 26. OE and Competition •Companies converge • They all follow the exact same strategic path – From “made-in-China” to “sold-in-Wal-mart” • And this is a race that no producer wins – So let’s reduce the number of ‘runners’ – and acquire our rivals • In a ‘buy or be bought’ world, no one enjoys true competitive advantage © McDermott, 2014. 26
- 27. It does not haveto be this way! © McDermott, 2014. 27
- 28. Competitive Strategy is aboutbeing different! © McDermott, 2014. 28
- 29. Determining Strategic Position •Perform similar activities differently Activities • Or perform different activities Value • Deliver a unique mix of value © McDermott, 2014. 29
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- 31. What do thoseon previous slide offer? • Often low cost • Because they do things differently • But in addition to that they often ‘break the rules’ in order to better meet the needs of their target market © McDermott, 2014. 31
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- 33. What do thoseon previous slide offer? • Often differentiation • Because they do things better • But in addition to that they often ‘break the rules’ in order to better meet the needs of their target market © McDermott, 2014. 33
- 34. Nature of StrategicPositioning • Means performing different activities from rivals or performing similar activities in different ways • Competitive advantage requires developing a distinct strategic position © McDermott, 2014. 34
- 35. What’s the Solutionto Developing Good Strategy? 1. According to Porter, it’s focusing upon creating a strong competitive position (i.e. developing a strategy) and then milking it; 2. Kim & Mauborgne suggest that the solution is developing a Blue Ocean Strategy 3. Rumelt suggests that the company must focus all energies on its “big issue” problem 4. Montgomery emphasizes the CEO as the “Guardian angel” of company strategy 5. Lafley and Martin stress it’s making tough choices 6. McGrath stresses that it’s the ability to “ride the waves” – knowing when to get off and get on many waves…knowing that some “rides” are a “success” and others a “disappointment”. © McDermott, 2014. 35