Strategy is not operational effectiveness
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The document discusses the difference between strategy and operational effectiveness. It argues that while constantly improving operations is important, it is not a strategy and does not provide sustainable competitive advantage on its own. Relying solely on better efficiency and lower costs will result in companies being overtaken by competitors as advantages erode over time. A true strategy involves performing activities differently than rivals and delivering unique customer value, in order to establish a distinct strategic position and long-term competitive advantage. Both operational excellence and a unique strategy are needed to achieve enduring superior performance.
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Strategy is not operational effectiveness
- 1. Strategy is Not Operational Effectiveness By Dr. Michael McDermott mcdermottm1@nku.edu
- 2. Structure 1. Common mistakes in 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, 2012. 2
- 3. Common mistakes in discussing 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, 2012. 3
- 4. What is Operational Effectiveness (OE)? • It’s all about internal performance • It’s about being: – Better, or – Cheaper, or – Faster, or – Wider (i.e. more international) © McDermott, 2012. 4
- 5. Nature and Limitations of 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, 2012. 5
- 6. Operational Effectiveness Constant improvement Being Better © McDermott, 2012. 6
- 7. Operational Effectiveness Law of Diminishing Returns and 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, 2012. 7
- 8. Nature and Limitations of 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, 2012. 8
- 9. The Limitations of OE • 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, 2012. 9
- 10. Operational Effectiveness Explains Initial Success of Asian Companies 1960s-80s Japanese companies are winners 1990s-2010s South Korean companies are winners © McDermott, 2012. 2020sChinese companies are winners 10
- 11. Operational Effectiveness May Deliver Advantage Briefly Being Better Operational Effectiveness © McDermott, 2012. 11
- 12. Operational Effectiveness May Deliver Advantage Briefly Temporary Competitive Advantage Operational Effectiveness © McDermott, 2012. 12
- 13. Running out of steam: 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, 2012. 13
- 14. Japanese Winners in the Past According to Porter, since they were better, they did not need to be smarter © McDermott, 2012. 14
- 16. Surely they were more 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, 2012. 16
- 17. Future Japanese Winners Must Also Be Smarter Do they have genuine strategy? © McDermott, 2012. 17
- 18. Genuine Strategy and Operational Effectiveness Deliver Enduring Competitive Advantage Genuine Strategy Operational Effectiveness Sustainable Competitive Advantage I am not sure that any competitive advantage is sustainable © McDermott, 2012. 18
- 19. Genuine Strategy and OE Both are essential for superior performance Excellence in one is not enough for enduring success or competitive advantage © McDermott, 2012. 19
- 20. Establishing Competitive Advantage • Deliver greater value to customers; 1 • Kroger, Meijer, Netflix, Nike, Under Armor • Create comparable value at lower prices; 2 • Coinstar, Dell, Samsung, Vizio • Do both 3 © McDermott, 2012. 20
- 21. Creating Competitive Advantage: Effectiveness vs 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, 2012. 21
- 22. 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, 2012. 22
- 24. Examples of Strategically Smart The Smarts The Laggards • Tend to be ‘different’ • Are innovative • Imitate and emulate their national rivals © McDermott, 2012. 24
- 25. 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, 2012. 25
- 26. It does not have to be this way! © McDermott, 2012. 26
- 27. Competitive Strategy is about being different!
- 28. Determining Strategic Position • Perform similar activities differently Activities • Or perform different activities • Deliver a unique mix of value Value
- 30. What do they 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
- 32. Nature of Strategic Positioning • Means performing different activities from rivals or performing similar activities in different ways • Competitive advantage requires developing a distinct strategic position
- 33. What’s the Solution? • According to Porter, it’s focusing upon creating a strong competitive position (i.e. developing a strategy) • Kim & Mauborgne suggest that the solution is developing a Blue Ocean Strategy • Rumelt suggests that the company must focus all energies on its “big issue” problem © McDermott, 2012. 33