Marketing Strategy week #1 Porter (1996): What is strategy?

Summary: What is strategy? The article examines this question on different levels. First of all, operational effectiveness (OE) is clearly seperated from strategy. While OE is about achieving excellence in individual activities or functions, a competitve strategy is about combining activities and being different. There are 3 sources of strategic positioning 1) variety-based positioning, 2) needs-based positioning & 3) access-based positioning.To build a strategy you need to make trade-offs & tighten the fit among a company’s activities. If there is no fit among activites, there is no distinctive strategy & little sustainability. There are 3 types of fit 1) simple consistency, 2) activities are reinforcing & 3) optimization of effort. Growth can be a trap in developing a strategy. 1. Operational effectiveness is no strategy
Environment: companies must be flexible to respond rapidly to competetive & market changes, they must outsource aggressively to gain efficiencies because competitors can quickly imitate mgmt-techniques, new technologies, input improvements & superior ways of meeting customer’s needs.

Definition Operational effectiveness (OE):
It means performing similar activities better than rivals do & to better utilize inputs by, e.g., developing products faster. OE includes efficiency but is not limited to it. Some companies get more out of their inputs (within OE) because they:
- eliminate wasted effort
- employ more advanced technology
- motivate empolyees better
- have greater insight into managing particular activities/sets of activities Definition Strategic Positioning (SP): It means performing different activities from rivals’ or performing the same activities in different ways. positioning – once the heart of strategy – is now rejected as too static for today’s dynamic markets & changing technologies; according to the new dogma, rivals can quickly copy any market position, & competitive advantage is, at best, temporary.

True: Some barriers to competition are falling as regulation eases & markets become global; companies have properly invested energy in becoming leaner & more nimble
But: In many industries, however, what some call hypercompetition is a self–inflicted wound & not the inevitable outcome of a changing paradigm of competition. The root of the problem is the failure to distinguish between operational effectiveness & strategy.
Result: Within the resulting operational improvements companies were still inable to translate those gains into sustainable profitability & got more & more frustrated. Bit by bit, management tools have taken the place of strategy & managers move farther away from viable competitive positions.

2. OE: Neccessary but not sufficient Both operational effectiveness & strategy are essential for superior performance, which is the primary goal for any company but they work in very different ways

How can companies outperform rivals?
- Establish a difference that it can preserve
- Deliver greater value to customers or create comparable value to lower cost, or not Arithmetic of superior profitability says: delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average unit costs
- Cost advantage arises from performing particular activities more efficiently

Differences in operational effectiveness differences in profitability among competitors because they directly affect relative cost positions

Historical Background: Back in 1980s Japanese companies were so far ahead to Western companies in operational effectiveness that they could offer lower costs & superior quality a lot of recent thinking about competition is based on that background
The productivity frontier is constantly shifting outward as new techn. & mgmt appr-oaches are developed & as new inputs become available.

E.g (’96): Laptops, mobile commction, Internet, software like Lotus notes
E.g. (’14):
Nanotechn., big data usage, tbc
The productivity frontier is constantly shifting outward as new techn. & mgmt appr-oaches are developed & as new inputs become available.

E.g (’96): Laptops, mobile commction, Internet, software like Lotus notes
E.g. (’14):
Nanotechn., big data usage, tbc
If a company improves it operational effectiveness it moves toward the frontier. Then they can often improve on many dimen-sions of per-formance sim-ultaneously.
Doing so may require ca-pital invest-ment, diff-erent person-nel, or simply new ways of managing.
If a company improves it operational effectiveness it moves toward the frontier. Then they can often improve on many dimen-sions of per-formance sim-ultaneously.
Doing so may require ca-pital invest-ment, diff-erent person-nel, or simply new ways of managing.
The inversed u-shaped graph constitutes the maximum value a company can deliver for a particular product at a given cost using the best available technology, skills, mgmt techniques & purchased inputs.
The inversed u-shaped graph constitutes the maximum value a company can deliver for a particular product at a given cost using the best available technology, skills, mgmt techniques & purchased inputs.

the example of Lotus notes is showing how the productivity frontier can be redefined for sales force operations & created rich possibilities for linking sales with such activities as order processing & after-sales support

What did they change?
- managers have changed how they perform activities in order to: eliminate ineffiencies, improve customer satisfaction, & achieve best practice (by using programmes such as TQM, improving time based competition & benchmarking)
- managers have embraced continuous improvement, empowerment, change mgmt, & the so-called learning organization
- the popularity of outsourcing & virtual corporation reflect the grwoing recognition that is diffucult to perform all activities as productively as specialists.

Why is OE not sufficient? Constant improvement in operational effectiveness is necessary to achieve superior profitability, however it is not usually sufficient, OE shifts the productivity frontier outward & therefore raising the bar for everyone
1) Competition produces absolute improvement in OE itself but it leads to relative improvement for no one. Referring to US commercial-printing industry as an example: The major player (such as World Color Press or Big Flower Press) are competing head to head in terms of serving all customers, offering the same array of printing technologies, investing heavily in the same new equipment etc. But the resulting in major productivity gains is being captured by customers & equipment suppliers not retained/reinvested in superior profitability & suffers from persistently low profits
2) Competitive convergence of companies: the more benchmarking they do, the more they look alike, the more rivals outsource activities to 3rd parties often the same ones, more generic do those activities become. It is not surprising that the recent increase of mergers (one company taking over another, mostly in the same industry) is a side effect of OE competition. Driven by performance pressure company after company has had no better idea to buy up its rivals. These unwitting drawled companies toward imitation & homogeneity & gradually managers have let OE supplant strategy.

3. Strategy rests on Unique Activities the essence of a strategy is in the activities – deliberately choosing to perform activities differently or to perform different activities than rivals in order to deliver a unique mix of value. strategy is the creation if a unique & valuable position, involving a different set of activities
Practical example of Southwest Airlines versus a full service airline (like Lufthansa):

Southwest Lufthansa - Offers short-haul, low-cost, point-to-point service between mid-size cities & secondary airports in large cities (they avoid large airports & don’t fly great distances)- Customers include business travellers, families & students - Standardized fleet of 737 aircraft boosts the efficiency of maintenance Clear strategic positioning: attracting price- & convenience-sensitive customers | - Are made to bring passengers from almost any point in A to any point in B & reach a large number of destinations - To attract passengers who want more comfort they offer first-class or business-class service & serve meals |

Origins of Strategic Positions emerge from 3 distinct sources:
(1) variety based positioning: means producing a subset of an industry’s products or services & is based on the choice of product/service varieties rather than customer segments. It makes economic sense when a company can best produce particular products/services using distinctive sets of activities. A variety based positioning can serve a wide array of customers jjbut for most it will meet only a subset of their needs.
Example: Jiffy Lube International specializes in automotive lubricants & does not offer other car repair or maintenance services. Its value chain produces faster service at a lower cost than broader line repair shops, a combination so attractive that many customers subdivide their purchases, buying oil changes from the focused competitor, Jiffy Lube, & going to rivals for other services. The people who use Jiffy Lube are responding to a superior value chain for a particular type of service.

(2) needs-based positioning: means serving most or all the needs of a particular group of customers & is closely related to traditional thinking about targeting a segment of customers.
It arises when there are groups of customers with differing needs, & when a tailored set of activities can serve those needs best. Some customers are more price sensitive than others, dem& different product features, need varying amounts of information, support & services. The same person may have different needs when travelling for business or travelling for pleasure with their family.
Example: Ikea seeks to meet the entire home furnishing needs of its target customers, not just a subset of them. It serves their price-sensitive customers, who have wide furnishing needs, a complete set of home furniture at a more cost effective price than traditional home furniture retailers. A focused competitor such as Ikea, targets the special needs of a subset of customers & designs its activities accordingly.

(3) access-based positioning: is segmenting customers who are accessible in different ways. Although their needs are similar to those of other customers, but the best configuration of activities to reach them is different. Access can be a function of customer geography or customer scale- or of anything that requires a different set of activities to reach customers the best way.
Example: Carmike Cinemas operates movie theatres exclusively in cities & towns with populations under 200,000. Carmike makes money through a set of activities that result in a lean cost structure: customers can be served through standardized, low-cost theatre complexes, fewer screens & less sophisticated projection technology than big-city theatres. Operating on small communities also allows Carmike to practice a highly personal form of marketing in which the theatre manager knows patrons & promotes attendance through personal contacts. Rural versus urban-based customers are one example of access driving differences in activities.

Conclusion: Whatever the basis – variety, needs, access, or some combination of the 3 – positioning requires a tailored set of activities because it is always a function of differences in activities.

4. Sustainable Strategic Position requires trade-offs Choosing a unique position is not enough to guarantee a sustainable advantage. A valuable position will attract imitation by incumbents, who are likely to copy.
(1) Repositioning itself to match the superior performer, e.g.: JC Penney has been repositioning itself from a Sears (American department store chain) clone to a more upscale, fashion-oriented, soft-goods (non-durable goods) retailer.
(2) Straddling by seeking to match the benefits of a successful position while maintaining its existing position, with grafting new features, services, or technologies onto the activities it already performs.

Can any competitor copy any other activity? Referring to an example from the airline industry as a test case:
Any airline can buy the same planes, lease the gates, & match menus & ticketing & baggage handling services offered by other airlines. Continental Airlines saw how well Southwest was doing and decided to straddle (reminder: trying to match benefits (here: low-cost service with point-to-point routes)), but maintaining existing position (here: full-service airline). By introducing Continental Lite, they eliminated meals & first-class services, increased departure frequency & lowered fares & they remained as a full-service airline on other routes. But another strategic position comes with trade-offs when the activities are incompatible. For Continental Airlines they can choose to serve meals on board – adding costs & slowing turnaround time at the gate – or they can choose not to, but they cannot decide to do both without bearing major inefficiencies. Trade-offs ultimately grounded Continental Lite & they lost millions of dollars because they tried to compete in 2 ways at once. In trying to be low cost on some routes & full service on others, they paid an enourmous straddling penalty. If there would not have been trade-offs they would have succeeded.

3 major reasons for trade-offs:
(1) Inconsistencies in image or reputation: For example Ivory soap with its position as a basic, inexpensive everyday soap would have a hard time reshaping its image to match Neutrogena’s premium „medical“ reputation. So, efforts to create a new image typically cost million of dollars in a major industry – a powerful barrier to imitation.
(2) Trade-offs arise from the activity itself: Different positions (with their tailored activities) require different product configurations, different employee behavior, different skills, & different mgmt systems. The more Ikea, as an example, has configured ist activities to lower costs by having the customers do their own assembly & delivery, the less it is to satisfy customers who require higher levels of service (trade-off in segmenting).
(3) Limits on internal coordination & control: By clearly choosing in which way to compete, senior mgmt makes organizational priorities clear. Companies that try to be all things to all customers, in contrast, risk confusion as employees attempt to make even basic decisions without a clear framework.

Positioning trade-offs are pervasive in competition & essential to strategy, they create the need for choice & purposefully limit what a company offers. They deter straddling or repositioning, because competitors engage in those approaches undermined their strategies & degrade the value of their existing activities In general, false trade-offs between cost & quality occur where there is redundant or wasted effort, poor control or accuracy, or weak coordination.

Conclusion: Getting back to the question of what strategy is 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 would be no need for a choice & thus nor need for a strategy. Any good idea could & would be quickly imitated. Again, performance would once again depend wholly on OE.

5. Fit drives both competitive advantage & sustainability
Southwest’s strategy involves a whole system of activities, not a collection of party. Its competitive advantage comes from the way its activities fit & reinforce each other. Fit locks out imitators by creating a chain that is as strong as its strongest link. As in most companies with good strategies, Southwest’s activities complement one another in ways that create real economic value, creates competitive advantage & superior profitability.

Types of fit:
1. order fit: simple consistency between each activtity (function) & the overall strategy. Consistency ensures that the competitive advantage of activities cumulate & do not erode or cancel themselves out. It makes the strategy easier to communicate to customers, employees, & shareholders.
Example: Vanguard (one of the world’s largest & most respected mutual fund companies) aligns all activities with its low-cost strategy & minimizes portfolio turnover & does not need highly compensate money managers. They distribute funds directly, avoiding commission to brokers. They limit advertising, relying instead on PR & WoM recommendations.
2. order fit: activites are reinforcing
Example: Neutrogena (American brand of skin care, hair care & cosmetics; belongs to Johnson&Johnson) markets to upscale hotels eager to offer their guests a soap recommended by dermatologists. Once guests tried Neutrogena in a luxury hotel, they are more likely to purchase it at the drugstore. Thus, Neutrogena’s medical & hotel activities reinforce one another, lowering total market costs.
3. order fit: optimization effort
Coordination & information exchange across activities to eliminate redundancy & minimize wasted effort are the most basic types of effort optimization. But there are higher levels as well. Product design choices can eliminate the need for after-sale service or make it possible for customers to perform service activities themselves.
Example: Gap (American casual clothes retailer) considers product availability in its store a critical element of its strategy. They could keep products either by holding store inventory or by restocking from warehouses. Gap optimized ist effort across these activities by restocking its selection of basic clothing almost daily out of 3 warehouses & thereby minimizing the need to carry large in-store inventories. Rapid restocking reduces the cost of implementing a short model cycle (6-8 weeks long).

Conclusion:
In all the 3 types of fit, the whole matters more than any individual part. Competitive advantage grows out of the entire system of activities. The fit among activities substantially reduces cost or increases differentiation & beyond that the competitive value of individual activities cannot be decoupled from the system or the strategy The list of strengths cuts across many functions, & one strength blends into others. It is more useful to think in terms of these themes that pervade many activities, such as low-cost or a particular conception of the value delivered. These themes are embodied in nests of tightly linked activities.

Mapping Activity Systems (MAS) MAS are showing how a company’s strategic position is contained in a set of tailored activities designed to deliver it. In companies with clear strategic position, a number of higher-order strategic themes (dark purple) can be identified & implemented through clusters of tightly linked activities (in light purple). (Mapping Activitiy System of Ikea )

Activity-stystem maps can be useful for examining & strengthening strategic fit. A set of basic questions should guide the process. First, is each activity consistent with the overall posi- tioning – the varieties produced, the needs served, & the type of customers accessed?

These questions are responsible for each activity to identify how other activities within the company improve or detract from their performance.
Second, are there ways to strengthen how activities & groups of activities reinforced one another? Finally, could changes in one activity eliminate the need to perform others?

Fit & Sustainability
Strategic fit among many activites is fundamental not only to the competitve advantage but also to the sustainability of that advantage. The more a company’s positioning rests on activities systems with 2nd & 3rd-order fit, the more sustainable its ad-vantage will be. Such systems are usually different to untangle from outside the company & therefore hard to copy. Fit means that poor performance in one activity will degrade the performance in others, to that weaknesses are ex-posed & more prone to get attention. One implication is that strategic positions should have a horizon of at least 10 years, not of a single planning cycle. Frequent shifts in positioning are costly due to realign the whole system.
Conclusion: Strategy is the fit among a company’s activites, the success of a strategy depends on doing many things well & integrating among them. If there is no fit among activites, there is no distinctive strategy & little sustainability.

6. Rediscovering Strategy Managers have become confused about the necessity of making choices. Unnerved by forecasts of hypercompetition, managers increase its likelihood by imitating everything about their competitors assuming “They might know something we don’t know“. The pursuit of OE is seductive because it is concrete & actionable. Caught up in the race of OE, many managers simply do not understand the need to have a strategy.
The Growth Trap among all other influences the most perverse one compromises and inconsistencies in the pursuit of growth will erode the competitive advantage a company had with its original varieties or target customers. Attempts to compete in several ways at once create confusion & undermine organizational motivation & focus. Profits might fall but more revenue is seen as the answer.
Profitable Growth What approaches to growth preserve & reinforce strategy? One approach is to look for extensions of the strategy that leverage the existing activity system by offering features or services that rival would find impossible or costly to match (e.g.: recommendation database of Netflix). So deepening a position involves making the company’s activities more distinctive, strengthening fit & communicating the strategy better to those customers who should value it
The Role of Leadership the challenge of developing or re-establishing a clear strategy is often primarily an organizational one & depends on leadership. The core of leadership is strategy: defining & communicating the company’s unique position, making trade-offs, & forging fit among activities. Strategy renders choices about what nor or do as important as choices about what to do. Deciding which target group of customers & needs the company should serve is fundamental to developing a strategy & of course, communicated strategy to guide employees in making choices in their individual activities & in day-to-day decisions. Strategic continuity, in fact, should make an organization’s continual improvement more effective
Emerging Industries (EI) & Technologies when developing a strategy in EI managers face a high level of uncertainty about the needs of customers, the products & services that prove the most desired. the companies that are enduringly successful will be those that begin as early as possible to define and embody a unique competitive position in their activities. a period of imitation may be inevitable in EI, but that period reflects the level of uncertainty rather than a desired state of affairs.