In 1996, Michael Porter, a professor at Harvard Business School, wrote a seminal article on business strategy. The article was titled What is Strategy? and Professor Porter did a pretty excellent job of answering that question.
Through his research he discovered that strategy is not just about creating a more effective and efficient enterprise. Operational effectiveness, performing activities better—faster or with few inputs and defects—than rivals is not enough. The problem is these best practices can be easily emulated by competitors. All this does is move the so-called “productivity frontier” or the maximum value any company can deliver at a given cost, given the best available technology, skills, and management techniques, ever and ever further out. Operational effectiveness may improve, but it improves for everyone. And what you end up with is a competitive convergence, competitors offering similar products/services in the same ways with the same value profile.
So how does a firm break out of this? We look to strategy.
First, strategy is the creation of a unique and valuable position, involving a different set of activities.
Porter describes the types of activities that businesses can partake in that will make a difference. A business can serve the few needs of many customers. For example, Jiffy Lube has a limited range of services they provide (auto lubricants), but they can provide those needs across a large population.
Or a business can serve the broad needs of few customers. Bessemer Trust, as an example, targets just high-net-worth customers, but they provide a broad range of services to that select clientele. By the way, these aren’t the only types of positioning activities a firm can engage in, but they are the most common.
When creating a unique and valuable position involving a different set of activities than your competition, what you’re really looking at doing is determining your retail mix. That specific combination of location, merchandise management, pricing, communication, store design & display, and customer service that defines who your business is as a retailer.
Second, strategy requires you to make trade-offs in competing—to choose what not to do.
Some competitive activities are incompatible; 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, Whirlpool’s decision to extend its product line and acquire other brands represented a failure to make difficult trade-offs: the boost in revenues came at the expense of operational efficiency.
We’ve also got to make important decisions about the target market we want to appeal to. Or put another way, what target markets must we say “no” to. If we look at this matrix of markets in retail fashion, you can see that the target markets are made up of which fashion segment to target as well as the retail format. If you can identify an underserved combination within a marketplace like this, then you have a better shot at competing and more opportunity for profits.
Third, strategy involves creating “fit” among a company’s activities. Fit has to do with the ways a company’s activities interact and reinforce one an- other. Fit drives sustainable competitive advantage. When activities mutually reinforce each other, competitors can’t easily imitate them.
Let’s look at an example:
When Continental Lite Airlines—what you don’t remember Continental Lite Airlines? Well you’re about to see why—when they tried to compete with Southwest Airlines’ by matching some of their activities the results were disastrous. It’s not enough to replicate the operational effectiveness of a competitor by copying technologies, skills, or management techniques, you must also copy the unique positioning of your competitor and the decisions behind that positioning, which is virtually impossible to do.
In this graphic, you can see an interconnected network of higher-order strategic themes in green and the tightly linked activities that identify and implement those themes in yellow.
Take for example, Southwest’s theme of Limited Passenger Service at the top. Surely that would be easy to copy. Just cut out some services your airline provides and voila you can now compete with Southwest. But hold up, it’s not that easy. Southwest is able to offer those limited passenger services at low fares because it also features point-to-point flights and not the hub-and-spoke system that other airlines use. This means there are also no baggage transfers so airport operations are simplified. The fast gate turnarounds also mean that they can have more flights leaving out of the same gate per day than their competitors. The problem was Continental Lite tried to compete with Southwest by copying the broad strokes of what Southwest was accomplishing, but not all of the interconnected activities that really made their strategy work. Continental Lite folded shortly after.
A firm like Southwest doesn’t just benefit from the sum of its activities.
The reality is those activities interact or multiply their efficiencies. A competitor can’t just replicate the parts that they think they can execute on to surpass a superior competitor, they would have to recreate all of it: the system, processes, people, as well as the technologies and offerings. Strategy is about creating something more than the sum of a businesses parts.
So, in a nutshell, strategy is about:
- Creating a unique and valuable position, involving a different set of activities than your competition. This is your unique retail mix.
- Making trade-offs in competing—choosing what not to do. This is selecting the right target market.
- Creating “fit” among a company’s activities. This is creating your sustainable competitive advantage though a tailored combination of activities that suits you and your customer’s needs.