1. What Is Strategy? (by Michael Porter)

2. What is Strategy? Author : Michael Porter
Professor, Harvard Business School
Director, Institute for Strategy and Competitiveness
Key Contribution
5 Forces, Value Chain, Generic Strategies,
Positioning, Cluster of Competence
Major Work
"How competitive forces shape strategy", (HBR, Mar/Apr 1979)
Competitive Strategy (Free Press, 1980)
Competitive Advantage (Free Press 1985)
"From Competitive Advantage to Corporate Strategy", (HBR, May/June 1987)
"What is Strategy", (HBR, Nov/Dec 1996)
"Strategy and the Internet", (HBR, Mar 2001)
Competitive Strategy

3. Table of Contents Operational Effectiveness Is Not Strategy
Strategies Rests on Unique Activities
A Sustainable Strategic Position Requires Trade-offs
Fit Drives Both Competitive Advantage and Sustainability
Rediscover Strategy

4. 1. Operational Effectiveness Is Not Strategy
Critique:
“Positioning – once the heart of strategy - is rejected as too static for today’s dynamic markets and changing technologies”
Why:
Rivals can quickly copy and market position, and competitive advantage is, at best, temporary  No Position  No Uniqueness
So… Adopt New Trends of Management Tools
Total Quality Management
Benchmark
Time-based Competition
Outsourcing
Reengineering
Change Management
Porter Argues ..
“Why” is dangerous half-truths (His counter arguments to follow on)
“New rules and tools”  mutually destructive competition/ “Hypercompetition”
Quest for…
Productivity
Quality
Speed
Operational
Improvements
Operational Improvements

5. 1. Operational Effectiveness Is Not Strategy
Unchanging Dogma in Market
Establish difference and preserve  Outperform rivals
Deliver greater value / Comparable value at lower cost / Both
Superior Profitability
Greater Value  Higher unit prices
Greater efficiency  Lower average unit cost
Key Factors in Differentiating Companies
Cost (Spend)
Activities (Do) – Value addition
Price (Harvest)
Difference between OE and
Strategic Positioning
OE: Performing similar activities
better than rivals
ST: Performing different activities
or similar activities different ways

6. 1. Operational Effectiveness Is Not Strategy
Productivity Frontier
Essence of Operational Effectiveness
Mastered by Japanese Companies in ’80s
Automobile industry (Honda, Toyota, …)
Lower cost & superior cost at the same
time
Constantly Shifting outward
New Technologies
New Management approaches
“Fitness Competition”
Consequence of Productivity Frontier / OE
Improvements gets harder (as activities get leaner)
Hard to sustain advantage (as it can quickly imitated)
Competitive Convergence (Benchmark, O/S)  Merger
Ex: RR Donnelley’s Profit Margin Drop
7% (80s)  4.6% (’95)
Diminishing Returns

7. 2. Strategy Rests on Unique Activities
Strategic Positioning
What is Strategy?
“Strategy is the creation of a unique and valuable position, involving a different set of activities”
Type
Suitable when…
Customer Characteristics
Example Companies
Variety-based Positioning
Choosing particular products/ Services
Wide array of customers
meeting subset of their needs
Jiffy Lube (Engine Oil only)
Vanguard Group (Predictable performance fund)
Needs-based Positioning
Choosing particular segments
Segment of customers
meeting all/most of their needs
Ikea (DIY for Working parents)
Bessemer Trust ( > $5M Acct)
Access-based Positioning
Choosing particular setting
Carmike Cinemas (Cities population under 200,000)

8. 2. Strategy Rests on Unique Activities
Case Study
Southwest Airlines
IKEA
Activity Attributes
Southwest Airlines
Other Airlines
Travel Distance
Short
Mid ~ Long
Servicing Cities
Midsize Cities
Major Cities
Airports
Secondary in the City
Major in the City
Aircrafts
Boeing 737
Boeing, Airbus, GD, …
Air Fare
Lowest
Expensive
Seating Class
1 Type
First, Business, Economy
Food Service
None
Meal, Beverages
Activity Attributes
IKEA
Typical Furniture Store
Furniture
DIY
Factory Assembled
Design
By IKEA (low-cost, modular)
By 3rd Party manufacturers
Showroom
Fraction of Furniture
All Furniture
Delivery
Right away (by customer)
Days ~ Weeks
Something new
In-store child care, until 9pm
None

9. 3. A Sustainable Strategic Position & Trade-offs
Positioning alone is not enough
Repositioning by competitors
Straddling (In actuality, path to destruction)
Continental Airlines  Continental Lite targeting Southwest Airlines
So… Needs Trade-offs to acquire sustainability
Trade-offs
“Choice thus protect”
Trade-offs arises in 3 aspects
Image and reputation
Ivory soap – inexpensive everyday soap
Activities
Internal coordination and control
Organizational Priority
Ex) Trade-off grounded Continental Lite
Confusing “Image and reputation”
What is Strategy?
“Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do.”

10. 4. Fit Drives Competitive Advantage & Sustainability
Differences of Strategy from Operational Effectiveness
OE: Excellence in individual activities
St: Fit in Combined activities
Fit
Company’s activities are interactively augmenting each other to support the strategic position  Locks out imitators / Living barrier
3 Degrees of fit
What is Strategy?
Strategy is creating fit among a company’s activities
Degree of Fit
Description
Example
First-order
Simple consistency
Vanguard in Low-cost strategy
Second-order
Activities are reinforcing
Neutrogena
Market Hotel
Hotel allows Neturogena logo on soap
Guest look for Neutrogena soap in drugstore
Third-order
Optimization of effort: Coordination information exchange
Gap’s Short model cycle
- Daily restocking of selections from 3 warehouses  minimize in-store inventory

11. 4. Fit Drives Competitive Advantage & Sustainability
Case Study: Fit of Southwest Airlines

12. Summary Operational Effectiveness is not Strategy
It’s tool for productivity acceleration
But it alone destroys a company
Basic Building Block of Strategy
Activities
3 Aspects of Strategy
Position - different set of activities
Trade-offs – choose not to do (No chasing of two rabbits)
Fit – All activities become living organs of a company