Presented by

Mudasir ali

Operational Effectiveness is Not StrategyPositioning should have been at the heart of strategy.

Hyper competition resulted from the inability to distinguishbetween operational effectiveness and strategy, this leads toincreasing dependence on management tools, instead of

strategy

various management tools like total quality management, benchmarking, time-based competition, outsourcing, partnering, reengineering, that are used today, do enhance and dramatically improve the operational effectiveness of a company but fail to provide the company with sustainable profitability

Thus, the root cause of the problem seems to be failure of

•Activities are the basic units of competitive advantage

•Differentiation in all activities the company is engage in are the key of competitive advantage.

Methods of achieving competitive advantage: What activities are performed > Do different things > Strategy

What sub-activities or variation of activities can be done > Do things differently > border line between Strategy and Operational Effectiveness > since Activities need to pose tradeoffs and make great fit with one another to be a sustainable differentiator/ to be called Strategy

How activities are performed > Do things better > Operational Effectiveness > rat race of productivity frontier

Do things more efficiently (less time, less labor input, less material input, less energy input, less capital input, less defect, less waste) > achieve cost advantage

Do things more productively (faster product development, faster go to market, better customer response time, better product delivery, faster fulfillment, better technology, stronger leadership)

Operational Effectiveness: Necessary but Not Sufficient

Although both operational effectiveness and strategy are necessary for the superior performance of an organization, they operate in different ways.

Operational Effectiveness: Performing similar activities better than rivals perform them. Operational effectiveness includes but is not limited to efficiency. It refers to many practices that allow a company to better utilize its inputs.

Strategy: Performing different activities from rivals’ or performing similar activities in different ways.

Porter states that a company can outperform rivals only if it can establish a difference it can preserve.

It must deliver greater value to customers or create comparable value at a lower cost, or do both

However, Porter argues that most companies today compete on the basis of operational effectiveness.

This concept of competition based on operational effectiveness is illustrated via the productivity frontier

The productivity frontier is the sum of all existing best practices at any given time or the maximum value that a company can create at a given cost, using the best available technologies, skills, management techniques, and purchased inputs.(PPF' A curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently.)

, when a company improves its operational effectiveness, it moves toward the frontier.

Competition based on operational effectiveness alone is mutually destructive, leading to wars of attrition that can be arrested only limiting competition

EXAMPLE:-Japanese companies, which started the global revolution in operational effectiveness in the 1970s and 1980s.

• Strategy is about being different, choosing different activities.Porter’s example (Soutwest Airlines and Ikea) shows that these companies are doing different things from their competitors AND doing things differently. it’s not that Southwest doesn’t have activities that are similar to their competitor, it’s just that they are also doing things differently, and the jewel is that they are doing different things.From this we can conclude that all companies are engaged, or have to be engaged in 3 kinds of activities:

1. Activities that are similar to their competitor

2. Doing activities differently

Strategy rests on unique activities

Strategy Implemented by Southwest and Ikea

Key Differentiators

Southwest IkeaStrategy Focus on low cost, convenient service on its routes Target young furniture buyer who wants style at low cost, trade

service for cost

No’s Not a full service airline

No First or Business class

No meals

No assigned seats

Interline baggage checking

No sales associate

No exclusive dependence on suppliers

No bulk/ whole size furniture

Minimal customizations and revisits

No delivery

Do’s Fast gate turnaround time > provide more departure with fewer airplanes

Automated ticketing > bypass agents’ commission

Standardized fleet of 737s > achieve scale at maintenance

Room like setting > customers visualize end product

Design own products

Products are modular and ready to assemble

On the spot shopping and self delivery

In store child care > customer don’t have nannies

Extended hours > customers work during normal shopping time

The Origins of Strategic Positions1. Variety-based positioning

2. Needs-based positioning

3. Access-based positioning

Porter explores the 3 sources of strategic position by giving examples of these companies

Variety Based Positioning Needs Based Positioning Access Based Positioning

Definition Producing a subset of an industry’s product or services Serving all or most of the needs of a particular group of

customers

Segmenting customers who are accessible in different ways (geography,

scale, or other differentiator that requires customizing of activities to reach

this group of customers)

Best used by - When companies can produce a particular product or

service using distinctive set of activities

- When there are groups of customers with different

needs and constraints- When the same customers has

different needs on different occasions or for different

types of transactions

- When the best way to configure activities to meet similar needs of

distinct groups of customers differs

Key factor - Responding to superior value chain for a particular type

of product/ service

- Configuring set of activities to specifically respond to

target segment needs- Customize the value chain to

profitably respond to the need of a specific group

- Configure activities to fulfill to similar needs of a group of customers

Sample Jiffy Lube International:

Focus on automotive lubricants

No other car repair or maintenance service

Resulting in faster service at lower cost, persuading

customer to get oil changes at this focused company

Ikea: Focus on fulfilling the need of young adult customers

Citibank Private Banking: Client with minimum assets of US$ 250,000

1 officer for 125 individuals

Limited on client site meeting

Convenient access to loans

RM refers client to product specialist

Carmike Cinemas:

Operate in cities and towns with populations under 200,000

Standardized low cost theater complexes

Fewer screen and less sophisticated projection technology

Requires only a single theater manager

Lower rent and payroll costs

Personal marketing (small communities)

Are often the only theater in small towns, better position with distributors

Vanguard Group:

Portfolio diversification and rock bottom expenses

Trade off extraordinary performance for good, yet

stable, performance

Minimize bets on interest rates and narrow stock

group

Discourage customer from incurring transaction costs

Become a staple of customer portfolio, its

pronounced position allow it to be must-have

category on its own

Bessemer Trust:

Families with more than US$ 5 million in investable

assets

1 officer for 14 families

Meeting on client site

Services aimed to fulfill need at this segment

(investment oversight and mgmt., estate

administration, non-traditional asset accounting)

Minimal request for loans

Rural vs Urban:

Small customers vs Large customers

Densely situated customers vs sparsely situated customers

A Sustainable Strategic Position Requires Trade-offs• According to Porter, a sustainable advantage cannot be guaranteed by simply choosing a unique position,

as competitors will imitate a valuable position in one of the two following ways:

1. A competitor can choose to reposition itself to match the superior performer.

2. A competitor can seek to match the benefits of a successful position while maintaining its existing position (known as straddling).

Thus, in order for a strategic position to be sustainable there must be trade-offs with other positions. "A trade-off means that more of one thing necessitates less of another

Moreover, trade-offs create the need for choice and protect against repositioners and straddlers. Thus, strategy can also be defined as making trade-offs in competing. The essence of strategy is choosing what not to do.

• Moreover, trade-offs create the need for choice and protect against repositioners and straddlers. Thus, strategy can also be defined as making trade-offs in competing. The essence of strategy is choosing what not to do.

• Some sample of trade offs erected by Neutrogena Soap, which positioning is somewhat of dermatologist soap:

• Advertise on medical journals (instead of general magazine) – the italic part is my own assumptions to highlight the trade offs

• Send direct mail to doctors (instead of end users)

• Attend medical conferences (instead of participating in consumer trade shows)

• Focuses distribution on drugstores (instead of supermarkets, sacrifice volume)

3 reasons why trade offs emerge:

Reason Inconsistencies in image or reputation From activities themselves Limits on internal coordination and controlIn what ways it become a barrier (or a constraint)

A company known for delivering one kind of value may lack the credibility to to deliver another kind of value

Reshaping an image is expensive

The more company has configured its its machinery, people, and systems to efficiently execute a set of activities, the the more it cannot fulfill services requiring another set of activities

Preventing an overdesign or under design of an activity respective to its useuse

Increasing productivity by limiting activity variations

Quality are not free On the flip side, low cost practices need

need adjustments in all parts of value chain in order to not be ‘cheap’

Make organization priorities clear Trying to be a jack of all trade risk

confusion at the front end level as employee try to make day to day decision without clear framework

Sample A soap known as basic inexpensive everyday everyday soap would find it very tough to match Neutrogena’s positioning as a premium ‘medical’ soap

Ikea achieve its position by asking customers customers to do their own delivery and assembly, this forbid Nokia from satisfying satisfying customers requiring higher level level of service

• Porter says that Operational Effectiveness had lead to the discovery of false trade offs.

• The unfortunate side effects is that managers learn to have the wrong belief that trade offs can be eliminated, it is unnecessary, it is ‘bad’.

• But without trade offs, there will be no lasting advantage, what will be is a arms race to excel at everything.

• Trade offs add an essential dimension to strategy, without trade offs, there’s no need to choose activities, no need for strategy. So, trade off is both the prerequisite as well as the tools of strategy.

Fit Drives Both Competitive Advantage and Sustainability

• "Fit locks out imitators by creating a chain that is as strong as its strongest link“

• Fit, as per Porter, is the central component of competitive advantage because discrete activities often affect one another

• There are three types of fit, which are not mutually exclusive:-1. First-order fit: Simple consistency between each activity (function) and

the overall strategy. Consistency ensures that the competitive advantages of activities cumulate and do not erode or cancel themselves out. Further, consistency makes it easier to communicate the strategy to customers, employees, and shareholders, and improves implementation through single-mindedness in the corporation.

2. Second-order fit: Occurs when activities are reinforcing.

3.

• Porter showed this beautifully with his activity system map for IKEA. • A large theme, say “limited customer service” links with “self selection by customer”. But “limited customer service” builds upon “self transport by customer”, “ease of transport and assembly”, and “self assembly by customer”, all of these link to each other.

• To compete with IKEA, you either copy the entire ecosystem altogether, circumvent them, or induce trends that make their ecosystem irrelevant.

• Fit also promotes sustainability of advantage. Since competitors are facing an entire ecosystem, with elements that allow and strengthen each other existence, they need to be very persistent, capitalize, or creative to be able to replicate or break your strategy.

Fit and Sustainability• Strategic fit is fundamental not only to competitive advantage but also to the sustainability of that advantage

• because it is harder for a competitor to match an array of interlocked activities than it is merely to replicate an individual activity.

• Thus, "positions built on systems of activities are far more sustainable than those built on individual activities“

• The more a company’s positioning rests on activity systemswith second- and third-order fit, the more sustainable its

advantage will be.

• Such systems are difficult to untangle and imitate even if the competitors are able to identify the interconnections

• Further, a competitor benefits very little by imitating only a few activities within the whole system.

• fit across activities, allowing an organization to build unique capabilities and skills custom-fitted to its strategy. Continuity also reinforces a company’s identity

• Thus, strategy can also be defined as creating fit among a company’s activities as the success of a strategy depends on doing many things well - not just a few - and integrating among them.

Rediscovering Strategy

•The 2 main reasons companies often go stray from finding strategy (the failure to choose and the pursuit of growth), how growth can be achieve without jeopardizing strategy and the role of leaders in directing and finding this strategy.

. Failure to choose• Managers have been confused about the necessity of making choices.

• Focusing on the efficiency frontier could lead one to think that companies should be able to beat its rivals simultaneously on all dimensions. Yet this kind of machismo could be unnecessary

• Some external and internal factors might lead managers to believe that they don’t need to choose. Sample of these factors are:-

1. Nobody remind managers on the need to make tradeoffs2. Pursuing technology for its own sake3. Pursuing operational effectiveness is seductive because it’s concrete and

actionable4. Best practice mentality, reinforce by information provided by business

publications and consultants5. Conventional wisdom within an industry6. Organizational realities like fear to making trade offs and choose the wrong one

Growth Trap

Blind pursuit of growth has a diluting effect on a company’s strategy.

Trade off place limits on growth by not allowing access to certain segment, lines of products, or distribution channel

.

When company faces pressure to grow, the managers could respond with incremental steps that blur their strategy

Yet these steps often require compromises and inconsistencies with the original strategy.

• Once these compromises are taken, a company’s uniqueness become less clear, and company find itself in a new field.

• This new field has less overall uniqueness and companies are forced to compete on operational effectiveness , further encouraging compromises and inconsistencies.

• Managers can achieve growth without spoiling its strategy by deepening a strategic position.

• This can be achieve in several ways:

1. Look for extension of the strategy that leverage existing activity system

2. Better penetrate needs and varieties where the company can offer distinctiveness

3.

Profitable Growth• One approach to persevering growth and reinforcing strategy is to concentrate on deepening a strategic position rather than broadening and compromising it.

• A company can do so by leveraging the existing activity system by offering features or services that rivals would find impossible or costly to match on a stand-alone basis.

• Thus, deepening a position means making the company’s activitiesdistinctive strengthening fit, and communicating strategy better

tothose customers who value it.

• But currently many companies attempt to grow by adding hot

• Globalization often allows growth that is consistent with a company’s strategy, as it opens larger markets for a focused strategy

• Thus, expanding globally is more likely to reinforce a company’s unique position than broadening domestically.EXAMPLE:-carmike now the largest theater in United StatesOwes its rapid growth to its disciplined concentration on small markets.

The Role of Leadership

"The challenge of developing or reestablishing a clear strategy is often primarily an organizational one and depends on leadership"

. Moreover, strong leaders, who are willing to make choices, are essential. General management should do more than just stewardship of individual functions. They should define and communicate the core company’s unique position, make trade-offs, and forge fit among the various activities of the company.

Further, the leader should decide which changes in the industry and customer demands, is the company going to respond to.

The leader should be able to teach others in the organization about strategy - and to say no.

• Strategy is about choosing what to do as well as what not to do.

• Deciding which target group of customers, varieties, and needs the company should serve is fundamental to developing a strategy.

• Strategy is also however, in deciding not to serve other customers or needs and not to offer certain features or services. Thus, strategy requires continuous discipline and clear communication.

• Strategy should guide employees in making choices that arise because of trade-offs in their individual activities and in day-to-day decisions.

Conclusion• Strategic continuity does not imply a static view of competition.

• A company must continually improve its operational effectiveness and actively try to shift the productivity frontier; at the same time, there needs to be ongoing effort to extend its uniqueness while strengthening the fit among its activities"

• . However, a company may have to change its strategic position due to a major structural change in the industry

• . A company should choose its new position depending on its ability to find new trade-offs and leverage a new system