Basically, strategy is about two things: deciding where you want your business to go, and deciding how to get there. A more complete definition is based on competitive advantage, the object of most corporate strategy:
Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm 's cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation. -- Michael Porter, Competitive Advantage, 1985, p.3
The figure below defines the choices of "generic strategy" a firm can follow. A firm 's relative position within an industry is given by its choice of competitive advantage (cost leadership vs. differentiation) and its choice of competitive scope. Competitive scope distinguishes between firms targeting broad industry segments and firms focusing on a narrow segment. Generic strategies are useful because they characterize strategic positions at the simplest and broadest level. Porter maintains that achieving competitive advantage requires a firm to make a choice about the type and scope of its competitive advantage. There are different risks inherent in each generic strategy, but being "all things to all people" is a sure recipe for mediocrity - getting "stuck in the middle".
Treacy and Wiersema (1995) offer another popular generic framework for gaining competitive advantage. In their framework, a firm typically will choose to emphasize one of three “value disciplines”: product leadership, operational excellence, and customer intimacy.
Porter 's Generic Strategies (source: Porter, 1985, p.12)
• Porter, Michael, Competitive Advantage, The Free Press, NY, 1985.
• Porter, Michael, "What is
References: • Porter, Michael, Competitive Advantage, The Free Press, NY, 1985. • Porter, Michael, "What is strategy?" Harvard Business Review v74, n6 (Nov-Dec, 1996):61 (18 pages). • Treacy, M., F. Wiersema, The Discipline of Market Leaders, Addison-Wesley, 1995. 2 Conceptual Strategy Frameworks: How Competitive Advantage is Created Frameworks vs. Models We distinguish here between strategy frameworks and strategy models. Strategy models have been used in theory building in economics to understand industrial organization. However, the models are difficult to apply to specific company situations. Instead, qualitative frameworks have been developed with the specific goal of better informing business practice. In another sense, we may also talk about “frameworks” in this class as referring to the guiding analytical approach you take to your project (i.e. decision analysis, economics, finance, etc.). Some Perspective on Strategy Frameworks: Internal and External Framing for Strategic Decisions It may be helpful to think of strategy frameworks as having two components: internal and external analysis. The external analysis builds on an economics perspective of industry structure, and how a firm can make the most of competing in that structure. It emphasizes where a company should compete, and what 's important when it does compete there. Porter 's 5 Forces and Value Chain concepts comprise the main externally-based framework. The external view helps inform strategic investments and decisions. Internal analysis, like core competence for example, is less based on industry structure and more in specific business operations and decisions. It emphasizes how a company should compete. The internal view is more appropriate for strategic organization and goal setting for the firm. Porter 's focus on industry structure is a powerful means of analyzing competitive advantage in itself, but it has been criticized for being too static in an increasingly fast changing world. The internal analysis emphasizes building competencies, resources, and decision-making into a firm such that it continues to thrive in a changing environment. Though some frameworks rely more on one type of analysis than another, both are important. However, neither framework in itself is sufficient to set the strategy of a firm. The internal and external views mostly frame and inform the problem. The actual firm strategy will have to take into account the particular challenges facing a company, and would address issues of financing, product and market, and people and organization. Some of these strategic decisions are event driven (particular projects or reorgs responding to the environment and opportunity), while others are the subject of periodic strategic reviews