Harvard Business Review - What is Strategy - Michael E.Porter potx

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ARTICLEWhat Is Strategy?by Michael E.PorterPRODUCT NUMBER 4134New sections toguide you throughthe article:• The Idea in Brief• The Idea at Work• Exploring Further . . .Rivals can easily copy your improvements in quality and efficiency.But they shouldn’t be able to copy your strategicpositioning—what distinguishes your companyfrom all the rest.HBROnPointFROM THE HARVARD BUSINESS REVIEW T myriad activities that go into creating,producing, selling, and delivering a product orservice are the basic units of competitive advan-tage. Operational effectiveness means perform-ing these activities better—that is, faster, or with fewer inputs and defects—than rivals.Companies can reap enormous advantages fromoperational effectiveness, as Japanese firmsdemonstrated in the 1970s and 1980s with suchpractices as total quality management and con-tinuous improvement. But from a competitivestandpoint, the problem with operational effectiveness is that best practices are easilyemulated. As all competitors in an industryadopt them, the productivity frontier—the maximum value a company can deliver at agiven cost, given the best available technology,skills, and management techniques—shifts out-ward, lowering costs and improving value at thesame time. Such competition produces absoluteimprovement in operational effectiveness, butrelative improvement for no one. And the morebenchmarking that companies do, the morecompetitive convergence you have—that is, the more indistinguishable companies are from one another.Strategic positioning attempts to achieve sus-tainable competitive advantage by preservingwhat is distinctive about a company. It meansperforming different activities from rivals, orperforming similar activities in different ways.What Is Strategy?T key principles underlie strategic positioning.1. Strategy is the creation of a unique and valuable position, involving a different set of activities. Strategic position emerges from three distinct sources:•serving few needs of many customers (Jiffy Lube provides only auto lubricants)• serving broad needs of few customers (Bessemer Trust targets only very high-wealth clients)• serving broad needs of many customers in a narrow market (Carmike Cinemas operates only in cities with a population under 200,000)2. Strategy requires you to make trade-offs in competing—to choose what not to do.Some competitive activities are incompati-ble; thus, gains in one area can be achieved only at the expense of another area. For example, Neutrogena soap is positioned more as a medicinal product than as a cleansing agent. The company says “no” to sales based on deodorizing, gives up large volume, and sacrifices manufacturing efficiencies. By contrast, Maytag’s decision to extend its product line and acquire otherbrands represented a failure to make difficult trade-offs: the boost in revenues came at the expense of return on sales.3. Strategy involves creating “fit” among a company’s activities. Fit has to do with the ways a company’s activities interact and reinforce one another. For example, Van-guard Group aligns all of its activities with a low-cost strategy; it distributes funds directly to consumers and minimizes port-folio turnover. Fit drives both competitive advantage and sustainability: when activi-ties mutually reinforce each other, competi-tors can’t easily imitate them. When Conti-nental Lite tried to match a few of South-west Airlines’ activities, but not the whole interlocking system, the results were disastrous.Employees need guidance about how to deepena strategic position rather than broaden orcompromise it. About how to extend the com-pany’s uniqueness while strengthening the fitamong its activities. This work of decidingwhich target group of customers and needs toserve requires discipline, the ability to set lim-its, and forthright communication. Clearly,strategy and leadership are inextricably linked.THE IDEAIN BRIEFTHE IDEA AT WORKHBR OnPoint © 2000 President and Fellows of Harvard College. All rights reserved.For almost two decades, managers have beenlearning to play by a new set of rules. Companiesmust be flexible to respond rapidly to compet-itive and market changes. They must benchmarkcontinuously toachieve best prac-tice. They mustoutsource aggres-sively to gain ef-ficiencies. Andthey must nur-ture a few core competencies in therace to stay ahead of rivals.Positioning – once the heart of strategyis reject-ed as too static for today’s dynamic markets andchanging technologies. According to the new dog-ma, rivals can quickly copy any market position,and competitive advantage is, at best, temporary.But those beliefs are dangerous half-truths, andthey are leading more and more companies downthe path of mutually destructive competition.True, some barriers to competition are falling asregulation eases and markets become global. True,companies have properly invested energy in becom-ing leaner and more nimble. In many industries,however, what some call hypercompetition is aself-inflicted wound, not the inevitable outcome ofa changing paradigm of competition.The root of the problem is the failure to distin-guish between operational effectiveness and strat-egy. The quest for productivity, quality, and speedhas spawned a remarkable number of managementtools and techniques: total quality management,benchmarking, time-based competition, outsourc-ing, partnering,reengineering,change manage-ment. Althoughthe resulting op-erational improve-ments have oftenbeen dramatic, many companies havebeen frustrated by their inability totranslate those gains into sustainable profitability.And bit by bit, almost imperceptibly, managementtools have taken the place of strategy. As manag-ers push to improve on all fronts, they move fartheraway from viable competitive positions.Operational Effectiveness: Necessary but Not SufficientOperational effectiveness and strategy are bothessential to superior performance, which, after all,is the primary goal of any enterprise. But they workin very different ways.HARVARD BUSINESS REVIEW November-December 1996Copyright © 1996 by the President and Fellows of Harvard College. All rights reserved.HBRNOVEMBER-DECEMBER 1996I. Operational Effectiveness Is Not StrategyWhat Is Strategy?Michael E. Porter is the C. Roland Christensen Professorof Business Administration at the Harvard BusinessSchool in Boston, Massachusetts.by Michael E. PorterA company can outperform rivals only if it canestablish a difference that it can preserve. It mustdeliver greater value to customers or create compa-rable value at a lower cost, or do both. The arith-metic of superior profitability then follows: deliver-ing greater value allows a company to charge higheraverage unit prices; greater efficiency results inlower average unit costs. Ultimately, all differences between companies incost or price derive from the hundreds of activitiesrequired to create, produce, sell, and deliver theirproducts or services, such as calling on customers,assembling final products, and training employees.Cost is generated by performing activities, and costadvantage arises from performing particular activi-ties more efficiently than competitors. Similarly,differentiation arises from both the choice of activi-ties and how they are performed. Activities, then,are the basic units of competitive advantage. Over-all advantage or disadvantage results from all acompany’s activities, not only a few.1Operational effectiveness (OE) means performingsimilar activities better than rivals perform them.Operational effectiveness includes but is not limit-ed to efficiency. It refers to any number of practicesthat allow a company to better utilize its inputs by,for example, reducing defects in products or devel-oping better products faster. In contrast, strategicpositioning means performing different activitiesfrom rivals’ or performing similar activities in dif-ferent ways.Differences in operational effectiveness amongcompanies are pervasive. Some companies are ableto get more out of their inputs than others becausethey eliminate wasted effort, employ more ad-vanced technology, motivate employees better, orhave greater insight into managing particular activ-ities or sets of activities. Such differences in opera-tional effectiveness are an important source of dif-ferences in profitability among competitors be-cause they directly affect relative cost positions and levels of differentiation.Differences in operational effectiveness were atthe heart of the Japanese challenge to Western com-panies in the 1980s. The Japanese were so far aheadof rivals in operational effectiveness that theycould offer lower cost and superior quality at thesame time. It is worth dwelling on this point, be-cause so much recent thinking about competitiondepends on it. Imagine for a moment a productivityfrontier that constitutes the sum ofall existing best practices at any giv-en time. Think of it as the maximumvalue that a company delivering aparticular product or service can cre-ate at a given cost, using the bestavailable technologies, skills, man-agement techniques, and purchasedinputs. The productivity frontier canapply to individual activities, to groups of linkedactivities such as order processing and manufactur-ing, and to an entire company’s activities. When acompany improves its operational effectiveness, itmoves toward the frontier. Doing so may requirecapital investment, different personnel, or simplynew ways of managing. The productivity frontier is constantly shiftingoutward as new technologies and management ap-proaches are developed and as new inputs becomeavailable. Laptop computers, mobile communica-tions, the Internet, and software such as LotusNotes, for example, have redefined the productivity62HARVARD BUSINESS REVIEW November-December 1996Operational Effectiveness Versus Strategic PositioningNonprice buyer value deliveredRelative cost positionlowlowhighhighProductivity Frontier(state of best practice)A company can outperformrivals only if it can establish a difference that it can preserve.This article has benefited greatly from the assistance of many individuals and companies. The author givesspecial thanks to Jan Rivkin, the coauthor of a relatedpaper. Substantial research contributions have beenmade by Nicolaj Siggelkow, Dawn Sylvester, and LuciaMarshall. Tarun Khanna, Roger Martin, and Anita Mc-Gahan have provided especially extensive comments. Japanese Companies Rarely Have Strategiesfrontier for sales-force operations and created richpossibilities for linking sales with such activities asorder processing and after-sales support. Similarly,lean production, which involves a family of activi-ties, has allowed substantial improvements inmanufacturing productivity and asset utilization.For at least the past decade, managers have beenpreoccupied with improving operational effective-ness. Through programs such as TQM, time-basedcompetition, and benchmarking, they have changedhow they perform activities in order to eliminateinefficiencies, improve customer satisfaction, andachieve best practice. Hoping to keep up with shifts in the productivity frontier, managers haveembraced continuous improvement, empowerment,change management, and the so-called learningorganization. The popularity of outsourcing and the virtual corporation reflect the growing recogni-tion that it is difficult to perform all activities asproductively as specialists.As companies move to the frontier, they can oftenimprove on multiple dimensions of performance atthe same time. For example, manufacturers thatadopted the Japanese practice of rapid changeoversin the 1980s were able to lower cost and improvedifferentiation simultaneously. What were once be-lieved to be real trade-offs – between defects andcosts, for example – turned out to be illusions cre-ated by poor operational effectiveness. Managershave learned to reject such false trade-offs.Constant improvement in operational effective-ness is necessary to achieve superior profitability.However, it is not usually sufficient. Few compa-nies have competed successfully on the basis of op-erational effectiveness over an extended period, andstaying ahead of rivals gets harder every day. Themost obvious reason for that is the rapid diffusionof best practices. Competitors can quickly imitatemanagement techniques, new technologies, inputimprovements, and superior ways of meeting cus-tomers’ needs. The most generic solutions – thosethat can be used in multiple settings – diffuse thefastest. Witness the proliferation of OE techniquesaccelerated by support from consultants.OE competition shifts the productivity frontieroutward, effectively raising the bar for everyone.But although such competition produces absoluteimprovement in operational effectiveness, it leadsto relative improvement for no one. Consider the$5 billion-plus U.S. commercial-printing industry.The major players – R.R. Donnelley & Sons Com-pany, Quebecor, World Color Press, and Big FlowerPress–are competing head to head, serving all typesof customers, offering the same array of printingtechnologies (gravure and web offset), investingheavily in the same new equipment, running theirpresses faster, and reducing crew sizes. But the re-sulting major productivity gains are being capturedby customers and equipment suppliers, not re-tained in superior profitability. Even industry-WHAT IS STRATEGY?HARVARD BUSINESS REVIEW November-December 199663The Japanese triggered a global revolution in opera-tional effectiveness in the 1970s and 1980s, pioneeringpractices such as total quality management and con-tinuous improvement. As a result, Japanese manufac-turers enjoyed substantial cost and quality advantagesfor many years.But Japanese companies rarely developed distinctstrategic positions of the kind discussed in this article.Those that did – Sony, Canon, and Sega, for example –were the exception rather than the rule. Most Japanesecompanies imitate and emulate one another. All rivalsoffer most if not all product varieties, features, and ser-vices; they employ all channels and match one anoth-ers’ plant configurations.The dangers of Japanese-style competition are nowbecoming easier to recognize. In the 1980s, with rivalsoperating far from the productivity frontier, it seemedpossible to win on both cost and quality indefinitely.Japanese companies were all able to grow in an ex-panding domestic economy and by penetrating globalmarkets. They appeared unstoppable. But as the gap inoperational effectiveness narrows, Japanese compa-nies are increasingly caught in a trap of their ownmaking. If they are to escape the mutually destructivebattles now ravaging their performance, Japanesecompanies will have to learn strategy.To do so, they may have to overcome strong culturalbarriers. Japan is notoriously consensus oriented, andcompanies have a strong tendency to mediate differ-ences among individuals rather than accentuate them.Strategy, on the other hand, requires hard choices. TheJapanese also have a deeply ingrained service traditionthat predisposes them to go to great lengths to satisfyany need a customer expresses. Companies that com-pete in that way end up blurring their distinct posi-tioning, becoming all things to all customers.This discussion of Japan is drawn from the author’sresearch with Hirotaka Takeuchi, with help fromMariko Sakakibara.leader Donnelley’s profit margin, consistentlyhigher than 7% in the 1980s, fell to less than 4.6%in 1995. This pattern is playing itself out in indus-try after industry. Even the Japanese, pioneers ofthe new competition, suffer from persistently lowprofits. (See the insert “Japanese Companies RarelyHave Strategies.”)The second reason that improved operational effectiveness is insufficient – competitive conver-gence – is more subtle and insidious. The morebenchmarking companies do, the more they lookalike. The more that rivals outsource activities toefficient third parties, often the same ones, themore generic those activities become. As rivals im-itate one another’s improvements in quality, cycletimes, or supplier partnerships, strategies convergeand competition becomes a series of races downidentical paths that no one can win. Competitionbased on operational effectiveness alone is mutu-ally destructive, leading to wars of attrition thatcan be arrested only by limiting competition.The recent wave of industry consolidationthrough mergers makes sense in the context of OEcompetition. Driven by performance pressures butlacking strategic vision, company after companyhas had no better idea than to buy up its rivals. Thecompetitors left standing are often those that out-lasted others, not companies with real advantage.After a decade of impressive gains in operationaleffectiveness, many companies are facing dimin-ishing returns. Continuous improvement has beenetched on managers’ brains. But its tools unwitting-ly draw companies toward imitation and homo-geneity. Gradually, managers have let operationaleffectiveness supplant strategy. The result is zero-sum competition, static or declining prices, andpressures on costs that compromise companies’ability to invest in the business for the long term.WHAT IS STRATEGY?64HARVARD BUSINESS REVIEW November-December 1996II. Strategy Rests on Unique ActivitiesCompetitive strategy is about being different. Itmeans deliberately choosing a different set of activ-ities to deliver a unique mix of value.Southwest Airlines Company, for example, offersshort-haul, low-cost, point-to-point service be-tween midsize cities and secondary airports in largecities. Southwest avoids large airports and does not fly great distances. Its customers include busi-ness travelers, families, and students. Southwest’sfrequent departures and low fares attract price-sensitive customers who otherwise would travel bybus or car, and convenience-oriented travelers whowould choose a full-service airline on other routes.Most managers describe strategic positioning interms of their customers: “Southwest Airlinesserves price- and convenience-sensitive travelers,”for example. But the essence of strategy is in the ac-tivities – choosing to perform activities differentlyor to perform different activities than rivals. Other-wise, a strategy is nothing more than a marketingslogan that will not withstand competition.A full-service airline is configured to get passen-gers from almost any point A to any point B. Toreach a large number of destinations and serve pas-sengers with connecting flights, full-service air-lines employ a hub-and-spoke system centered onmajor airports. To attract passengers who desiremore comfort, they offer first-class or business-class service. To accommodate passengers whomust change planes, they coordinate schedules andcheck and transfer baggage. Because some passen-gers will be traveling for many hours, full-serviceairlines serve meals.Southwest, in contrast, tailors all its activities to deliver low-cost, convenient service on its par-ticular type of route. Through fast turnarounds at the gate of only 15 minutes, Southwest is able to keep planes flying longer hoursthan rivals and provide frequent de-partures with fewer aircraft. South-west does not offer meals, assignedseats, interline baggage checking, orpremium classes of service. Auto-mated ticketing at the gate encour-ages customers to bypass travelagents, allowing Southwest to avoidtheir commissions. A standardized fleet of 737 air-craft boosts the efficiency of maintenance.Southwest has staked out a unique and valuablestrategic position based on a tailored set of activi-ties. On the routes served by Southwest, a full-The essence of strategy ischoosing to perform activitiesdifferently than rivals do.Finding New Positions: The Entrepreneurial Edgeservice airline could never be as convenient or aslow cost.Ikea, the global furniture retailer based in Swe-den, also has a clear strategic positioning. Ikea tar-gets young furniture buyers who want style at lowcost. What turns this marketing concept into a stra-tegic positioning is the tailored set of activities thatmake it work. Like Southwest, Ikea has chosen toperform activities differently from its rivals.Consider the typical furniture store. Showroomsdisplay samples of the merchandise. One areamight contain 25 sofas; another will display fivedining tables. But those items represent only a frac-tion of the choices available to customers. Dozensof books displaying fabric swatches or wood sam-ples or alternate styles offer customers thousandsof product varieties to choose from. Salespeople of-ten escort customers through the store, answeringquestions and helping them navigate this maze ofchoices. Once a customer makes a selection, the order is relayed to a third-party manufacturer. Withluck, the furniture will be delivered to the cus-tomer’s home within six to eight weeks. This is a value chain that maximizes customization andservice but does so at high cost.In contrast, Ikea serves customers who are happy to trade off service for cost. Instead of havinga sales associate trail customers around the store,Ikea uses a self-service model based on clear, in-store displays. Rather than rely solely on third-party manufacturers, Ikea designs its own low-cost,modular, ready-to-assemble furniture to fit its posi-tioning. In huge stores, Ikea displays every productit sells in room-like settings, so customers don’tneed a decorator to help them imagine how to putthe pieces together. Adjacent to the furnishedshowrooms is a warehouse section with the prod-ucts in boxes on pallets. Customers are expected todo their own pickup and delivery, and Ikea willeven sell you a roof rack for your car that you can return for a refund on your next visit.Although much of its low-cost position comesfrom having customers “do it themselves,” Ikea of-fers a number of extra services that its competitorsdo not. In-store child care is one. Extended hoursare another. Those services are uniquely alignedwith the needs of its customers, who are young, notwealthy, likely to have children (but no nanny),and, because they work for a living, have a need to shop at odd hours.The Origins of Strategic PositionsStrategic positions emerge from three distinctsources, which are not mutually exclusive andoften overlap. First, positioning can be based onHARVARD BUSINESS REVIEW November-December 199665Strategic competition can be thought of as theprocess of perceiving new positions that woo cus-tomers from established positions or draw new cus-tomers into the market. For example, superstores of-fering depth of merchandise in a single productcategory take market share from broad-line depart-ment stores offering a more limited selection in manycategories. Mail-order catalogs pick off customers whocrave convenience. In principle, incumbents and en-trepreneurs face the same challenges in finding newstrategic positions. In practice, new entrants oftenhave the edge.Strategic positionings are often not obvious, andfinding them requires creativity and insight. New en-trants often discover unique positions that have beenavailable but simply overlooked by established com-petitors. Ikea, for example, recognized a customergroup that had been ignored or served poorly. CircuitCity Stores’ entry into used cars, CarMax, is based ona new way of performing activities – extensive refur-bishing of cars, product guarantees, no-haggle pricing,sophisticated use of in-house customer financing –that has long been open to incumbents.New entrants can prosper by occupying a positionthat a competitor once held but has ceded throughyears of imitation and straddling. And entrants com-ing from other industries can create new positions be-cause of distinctive activities drawn from their otherbusinesses. CarMax borrows heavily from CircuitCity’s expertise in inventory management, credit, andother activities in consumer electronics retailing.Most commonly, however, new positions open upbecause of change. New customer groups or purchaseoccasions arise; new needs emerge as societies evolve;new distribution channels appear; new technologiesare developed; new machinery or information systemsbecome available. When such changes happen, newentrants, unencumbered by a long history in the in-dustry, can often more easily perceive the potential fora new way of competing. Unlike incumbents, new-comers can be more flexible because they face notrade-offs with their existing activities.producing a subset of an industry’s products or ser-vices. I call this variety-based positioning becauseit is based on the choice of product or service vari-eties rather than customer segments. Variety-basedpositioning makes economic sense when a com-pany can best produce particular products or ser-vices using distinctive sets of activities.Jiffy Lube International, for instance, specializesin automotive lubricants and does not offer othercar repair or maintenance services. Its value chainproduces faster service at a lower cost than broaderline repair shops, a combination so attractive thatmany customers subdivide their purchases, buyingoil changes from the focused competitor, Jiffy Lube,and going to rivals for other services.The Vanguard Group, a leader in the mutual fundindustry, is another example of variety-based posi-tioning. Vanguard provides an array of commonstock, bond, and money market funds that offer pre-dictable performance and rock-bottom expenses.The company’s investment approach deliberatelysacrifices the possibility of extraordinary perfor-mance in any one year for good relative perfor-mance in every year. Vanguard is known, for exam-ple, for its index funds. It avoids making bets oninterest rates and steers clear of narrow stockgroups. Fund managers keep trading levels low,which holds expenses down; in addition, the com-pany discourages customers from rapid buying andselling because doing so drives up costs and canforce a fund manager to trade in order to deploy newcapital and raise cash for redemptions. Vanguardalso takes a consistent low-cost approach to manag-ing distribution, customer service, and marketing.Many investors include one or more Vanguardfunds in their portfolio, while buying aggressivelymanaged or specialized funds from competitors.The people who use Vanguard or Jiffy Lube are re-sponding to a superior value chain for a particulartype of service. A variety-based positioning canserve a wide array of customers, but for most it willmeet only a subset of their needs.A second basis for positioning is that of servingmost or all the needs of a particular group of cus-tomers. I call this needs-based positioning, whichcomes closer to traditional thinking about targetinga segment of customers. It arises when there aregroups of customers with differing needs, and whena tailored set of activities can serve those needsbest. Some groups of customers are more price sen-sitive than others, demand different product fea-tures, and need varying amounts of information,support, and services. Ikea’s customers are a goodexample of such a group. Ikea seeksto meet all the home furnishingneeds of its target customers, notjust a subset of them.A variant of needs-based position-ing arises when the same customerhas different needs on different occa-sions or for different types of transac-tions. The same person, for example,may have different needs when trav-eling on business than when travel-ing for pleasure with the family. Buyers of cans –beverage companies, for example – will likely havedifferent needs from their primary supplier thanfrom their secondary source.It is intuitive for most managers to conceive oftheir business in terms of the customers’ needsthey are meeting. But a critical element of needs-based positioning is not at all intuitive and is oftenoverlooked. Differences in needs will not translateinto meaningful positions unless the best set of activities to satisfy them also differs. If that werenot the case, every competitor could meet thosesame needs, and there would be nothing unique orvaluable about the positioning. In private banking, for example, Bessemer TrustCompany targets families with a minimum of $5 million in investable assets who want capitalpreservation combined with wealth accumulation.By assigning one sophisticated account officer forevery 14 families, Bessemer has configured its ac-tivities for personalized service. Meetings, for ex-ample, are more likely to be held at a client’s ranchor yacht than in the office. Bessemer offers a widearray of customized services, including investmentmanagement and estate administration, oversightof oil and gas investments, and accounting for race-horses and aircraft. Loans, a staple of most privatebanks, are rarely needed by Bessemer’s clients andmake up a tiny fraction of its client balances and income. Despite the most generous compensationof account officers and the highest personnel cost as a percentage of operating expenses, Bessemer’sdifferentiation with its target families produces areturn on equity estimated to be the highest of anyprivate banking competitor.WHAT IS STRATEGY?66HARVARD BUSINESS REVIEW November-December 1996Strategic positions can be basedon customers’ needs, customers’accessibility, or the variety of acompany’s products or services.Citibank’s private bank, on the other hand,serves clients with minimum assets of about$250,000 who, in contrast to Bessemer’s clients,want convenient access to loans–from jumbo mort-gages to deal financing. Citibank’s account man-agers are primarily lenders. When clients need oth-er services, their account manager refers them toother Citibank specialists, each of whom handlesprepackaged products. Citibank’s system is lesscustomized than Bessemer’s and allows it to have alower manager-to-client ratio of 1:125. Biannual of-fice meetings are offered only for the largest clients.Both Bessemer and Citibank have tailored their ac-tivities to meet the needs of a different group of pri-vate banking customers. The same value chain can-not profitably meet the needs of both groups.The third basis for positioning is that of seg-menting customers who are accessible in differentways. Although their needs are similar to those ofother customers, the best configuration of activi-ties to reach them is different. I call this access-based positioning. Access can be a function of cus-tomer geography or customer scale – or of anythingthat requires a different set of activities to reachcustomers in the best way.Segmenting by access is less common and lesswell understood than the other two bases. CarmikeCinemas, for example, operates movie theaters ex-clusively in cities and towns with populations un-der 200,000. How does Carmike make money inmarkets that are not only small but also won’t sup-port big-city ticket prices? It does so through a set of activities that result in a lean cost structure.Carmike’s small-town customers can be servedthrough standardized, low-cost theater complexesrequiring fewer screens and less sophisticated pro-jection technology than big-city theaters. The com-pany’s proprietary information system and manage-ment process eliminate the need for local adminis-trative staff beyond a single theater manager.Carmike also reaps advantages from centralizedpurchasing, lower rent and payroll costs (because ofits locations), and rock-bottom corporate overheadof 2% (the industry average is 5%). Operating insmall communities also allows Carmike to prac-tice a highly personal form of marketing in whichthe theater manager knows patrons and promotesattendance through personal contacts. By being thedominant if not the only theater in its markets–themain competition is often the high school footballteam – Carmike is also able to get its pick of filmsand negotiate better terms with distributors.Rural versus urban-based customers are one ex-ample of access driving differences in activities.Serving small rather than large customers or dense-ly rather than sparsely situated customers are otherexamples in which the best way to configure mar-keting, order processing, logistics, and after-saleservice activities to meet the similar needs of dis-tinct groups will often differ.Positioning is not only about carving out a niche.A position emerging from any of the sources can bebroad or narrow. A focused competitor, such asIkea, targets the special needs of a subset of cus-tomers and designs its activities accordingly. Fo-cused competitors thrive on groups of customerswho are overserved (and hence overpriced) by morebroadly targeted competitors, or underserved (andhence underpriced). A broadly targeted competitor–for example, Vanguard or Delta Air Lines – serves a wide array of customers, performing a set of ac-tivities designed to meet their common needs. It HARVARD BUSINESS REVIEW November-December 199667The Connection with Generic StrategiesIn Competitive Strategy (The Free Press, 1985), I introduced the concept of generic strategies – costleadership, differentiation, and focus – to repre-sent the alternative strategic positions in anindustry. The generic strategies remain use-ful to characterize strategic positions at thesimplest and broadest level. Vanguard, for in-stance, is an example of a cost leadership strat-egy, whereas Ikea, with its narrow customergroup, is an example of cost-based focus. Neu-trogena is a focused differentiator. The basesfor positioning – varieties, needs, and access – carrythe understanding of those generic strategies to agreater level of specificity. Ikea and Southwest areboth cost-based focusers, for example, but Ikea’s focusis based on the needs of a customer group, andSouthwest’s is based on offering a particularservice variety. The generic strategies framework intro-duced the need to choose in order to avoid be-coming caught between what I then describedas the inherent contradictions of differentstrategies. Trade-offs between the activitiesof incompatible positions explain those con-tradictions. Witness Continental Lite, which tried andfailed to compete in two ways at once.ignores or meets only partially the more idiosyn-cratic needs of particular customer groups.Whatever the basis – variety, needs, access, orsome combination of the three – positioning re-quires a tailored set of activities because it is al-ways a function of differences on the supply side;that is, of differences in activities. However, posi-tioning is not always a function of differences onthe demand, or customer, side. Variety and accesspositionings, in particular, do not rely on any cus-tomer differences. In practice, however, variety oraccess differences often accompany needs differ-ences. The tastes – that is, the needs – of Carmike’ssmall-town customers, for instance, run more to-ward comedies, Westerns, action films, and familyentertainment. Carmike does not run any films rated NC-17.Having defined positioning, we can now begin toanswer the question, “What is strategy?” Strategyis the creation of a unique and valuable position, in-volving a different set of activities. If there wereonly one ideal position, there would be no need for strategy. Companies would face a simple imper-ative – win the race to discover and preempt it. Theessence of strategic positioning is to choose ac-tivities that are different from rivals’. If the sameset of activities were best to produce all varieties,meet all needs, and access all customers, companiescould easily shift among them and operational ef-fectiveness would determine performance.WHAT IS STRATEGY?68HARVARD BUSINESS REVIEW November-December 1996III. A Sustainable Strategic Position Requires Trade-offsChoosing a unique position, however, is notenough to guarantee a sustainable advantage. Avaluable position will attract imitation by incum-bents, who are likely to copy it in one of two ways.First, a competitor can reposition itself to matchthe superior performer. J.C. Penney, for instance,has been repositioning itself from a Sears clone to amore upscale, fashion-oriented, soft-goods retailer.A second and far more common type of imitation isstraddling. The straddler seeks to match the bene-fits of a successful position while maintaining itsexisting position. It grafts new features, services, ortechnologies onto the activities it already performs.For those who argue that competitors can copyany market position, the airline industry is a per-fect test case. It would seem that nearly any com-petitor could imitate any other airline’s activities.Any airline can buy the same planes, lease thegates, and match the menus and ticketing and bag-gage handling services offered by other airlines.Continental Airlines saw how well Southwestwas doing and decided to straddle. While main-taining its position as a full-service airline, Conti-nental also set out to match Southwest on a num-ber of point-to-point routes. The airline dubbed the new service Continental Lite. It eliminatedmeals and first-class service, increased departurefrequency, lowered fares, and shortened turnaroundtime at the gate. Because Continental remained a full-service airline on other routes, it continued touse travel agents and its mixed fleet of planes and to provide baggage checking and seat assignments.But a strategic position is not sustainable unlessthere are trade-offs with other positions. Trade-offsoccur when activities are incompatible. Simplyput, a trade-off means that more of one thing neces-sitates less of another. An airline can choose toserve meals – adding cost and slowing turnaroundtime at the gate – or it can choose not to, but it can-not do both without bearing major inefficiencies.Trade-offs create the need for choice and protectagainst repositioners and straddlers. Consider Neu-trogena soap. Neutrogena Corporation’s variety-based positioning is built on a “kind to the skin,”residue-free soap formulated for pH balance. With a large detail force calling on dermatologists, Neu-trogena’s marketing strategy looks more like a drugcompany’s than a soap maker’s. It advertises inmedical journals, sends direct mail to doctors, at-tends medical conferences, and performs researchat its own Skincare Institute. To reinforce its posi-tioning, Neutrogena originally focused its distribu-tion on drugstores and avoided price promotions.Neutrogena uses a slow, more expensive manufac-turing process to mold its fragile soap.In choosing this position, Neutrogena said no tothe deodorants and skin softeners that many cus-tomers desire in their soap. It gave up the large-volume potential of selling through supermarketsand using price promotions. It sacrificed manufac-turing efficiencies to achieve the soap’s desired at-tributes. In its original positioning, Neutrogenamade a whole raft of trade-offs like those, trade-offsthat protected the company from imitators.Trade-offs arise for three reasons. The first is in-consistencies in image or reputation. A companyknown for delivering one kind of value may lackcredibility and confuse customers – or even under-[...]... order, call 1-8 0 0-5 4 5-7 685 HARVARD BUSINESS REVIEW November-December 1996 E XI PBL L R II N G RFFAURRTTHHY ERR O I ON G O R G U P H E B What Is Strategy? ARTICLES “Clusters and the New Economics of Competition” by Michael E Porter (Harvard Business Review, November–December 1998, Product no 98609) “From Competitive Advantage to Corporate Strategy by Michael E Porter (Harvard Business Review, May–June... uniqueness, HARVARD BUSINESS REVIEW November-December 1996 WHAT IS STRATEGY? create compromises, reduce fit, and ultimately undermine competitive advantage In fact, the growth imperative is hazardous to strategy What approaches to growth preserve and reinforce strategy? Broadly, the prescription is to concentrate on deepening a strategic position rather than broadening and compromising it One approach is to... changes to stimulate impulse buying To handle point-of-sale tasks, a company needs a large sales force Bic’s is the largest in its industry, and it handles point-of-sale activities better than its rivals do Moreover, the combination of point-of-sale 72 HARVARD BUSINESS REVIEW November-December 1996 WHAT IS STRATEGY? the Gap’s short model cycle, which is six to eight weeks long.3 Coordination and information... eliminating trade-offs is a good thing But if there are no trade-offs companies will never achieve a sustainable advantage They will have to run faster and faster just to stay in place As we return to the question, What is strategy? we see that 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... benefits of existing relationships among business units Therefore, corporate leaders must examine closely any acquisition candidate’s “fit” with the parent company’s existing businesses “How Competitive Forces Shape Strategy by Michael E Porter (Harvard Business Review, March–April 1979, Product no 79208) On Competition by Michael E Porter (1998, Harvard Business School Press, Product no 7951) In this McKinsey... choose a distinct position in the first place, is “me-too” or hedged activity configurations, inconsistencies across functions, and organizational dissonance What is strategy? We can now complete the answer to this question 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 no fit... Activities tailored to strategy Clear trade-offs and choices vis-à-vis competitors Competitive advantage arises from fit across activities Sustainability comes from the activity system, not the parts Operational effectiveness a given HARVARD BUSINESS REVIEW November-December 1996 tems Some activities may never catch up to the vacillating strategy The inevitable result of frequent shifts in strategy, or of... of productivity in order to achieve prosperity, are all intimately related to strategic positioning BOOKS HARVARD BUSINESS SCHOOL PUBLISHING www.hbsp .harvard. edu U.S and Canada: 80 0-9 8 8-0 886 61 7-7 8 3-7 500 • Fax: 61 7-7 8 3-7 555 To learn about other products from HBR OnPoint, please visit: www.hbsp .harvard. edu/products/articles/hbronpoint.html ... sensible at the time, many established companies have compromised their way to homogeneity with their rivals The issue here is not with the companies whose historical position is no longer viable; their challenge is to start over, just as a new entrant would At issue is a far more common phenomenon: the established company achieving mediocre returns and lacking a clear strategy Through incremental additions... material costs, and in-house parts production whenever the economics dictate Yet Bic goes beyond simple consistency because its activities are reinforcing For example, the company uses point-of-sale displays and frequent pack- Shareholder education cautioning about risk Long-term investment encouraged No first-class travel for executives Emphasis on bonds and equity index funds On-line information access . Harvard College. All rights reserved.HBRNOVEMBER-DECEMBER 1996I. Operational Effectiveness Is Not Strategy What Is Strategy? Michael E. Porter is the C. Roland. industry- WHAT IS STRATEGY? HARVARD BUSINESS REVIEW November-December 199663The Japanese triggered a global revolution in opera-tional effectiveness in the
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