Michael Porter

Topics: Strategic management, Management, Positioning Pages: 8 (2512 words) Published: October 18, 2010
I. Operational Effectiveness Is Not Strategy
According to Porter, 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 management to distinguish between operational effectiveness and strategy: Management tools have taken the place of strategy. 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 (OE): Performing similar activities better than rivals perform them. OE 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. Moreover, 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 OE competition is illustrated via the productivity frontier, depicted in the figure above. 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. Thus, when a company improves its operational effectiveness, it moves toward the frontier. The frontier is constantly shifting outward as new technologies and management approaches are developed and as new inputs become available. To keep up with the continuous shifts in the productivity frontier, managers have adopted techniques like continuous improvement, empowerment, learning organization, etc. Although companies improve on multiple dimensions of performance at the same time as they move toward the frontier, most of them fail to compete successfully on the basis of operational effectiveness over an extended period. The reason for this being that competitors are quickly able to imitate best practices like management techniques, new technologies, input improvements, etc. Thus, OE competition shifts the frontier outward and effectively raises the bar for everyone. But such competition only produces absolute improvement in operational effectiveness and no relative improvement for anyone. "Competition based on operational effectiveness alone is mutually destructive, leading to wars of attrition that can be arrested only limiting competition" (p. 64). Such OE competition can be witnessed in Japanese companies, which started the global revolution in operational effectiveness in the 1970s and 1980s. However, now companies (including the Japanese) competing solely on operational effectiveness are facing diminishing returns, zero-sum competition, static or declining prices, and pressures on costs that compromise companies’ ability to invest in the business for the long term. II. Strategy Rests on Unique Activities

"Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value" (p. 64). Moreover, the essence of strategy, according to Porter, is choosing to perform activities differently than rivals do. Strategy is the creation of a unique and valuable position, involving a different set of activities. The Origins of Strategic Positions

Strategic positions emerge from three sources, which are not mutually exclusive and often overlap. 1. Variety-based positioning: Produce a subset of an industry’s products or services. It is based on the...
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