Michael Porter

HBR
November/December 1996

Strategy: the creation of a unique and

valuable position involving a unique set of
activities; being different
Activities: the basic units of competitive
advantage
Competitive Advantage: grows out of the
entire system of activities; capacity to
outperform rivals by establishing a
difference it can preserve over time

Differentiation: created by the choice of

activities and how well performed
Strategic Positioning: means performing
different activities from rivals or performing
similar activities in different ways
Operational Effectiveness (OE): means
performing similar activities better than
rivals

Delivering greater value allows a company

to charge higher average unit prices;
greater efficiency results in lower average
unit costs
Differences in operational effectiveness (OE)
are importance differentiators in profitability
among rivals as OE directly affects relative
cost positions and levels of differentiation.

Sum of all best practices at a given time

The maximum value that a firm can provide
at a given cost using best practices
As OE improves within a firm, it moves
closer to the productivity frontier.
OE is necessary for superior profitability but
not solely sufficient. Rapid diffusion of best
practices reduces long-term impact of OE
on profitability.

OE competition pushes the productivity

frontier outward
OE competition produces absolute
improvement in firm performance yet no
relative improvement between surviving
competitors. Leads to self-inflicted
wounds i.e. hyper-competition, zero-sum
competition, static or declining prices and
lower profitability.

The more rivals copy and imitate OE best

practices the more they begin to look the
same.
Leads to imitation (consultants as seed
sowers) and homogeneity.
OE imitation leads to strategy convergence
and competition becomes mutually
destructive leading to wars of attrition (loselose). Leads to M&A activity as end-game.

Being different in the marketplace from

rivals
Deliberately choosing a different set of
activities to deliver a unique mix of value
The essence of strategy is in choosing to
perform activities differently, or to perform
different activities (or both), than rivals.

Variety-based: produces a subset of

industry products/services; based on the
choice of product/service varieties rather
than customer segments; viable when a
firm can best produce particular
products/services using a distinct set of
activities. Serves a wide array of customers
but only a subset of their needs.

Needs-based: serves most or all of the

needs of a particular group of customers
with a tailored set of activities; differences
in needs will not translate into meaningful
positions unless the best set of activities to
satisfy them also differs.

Access-based: segmenting customers who

are accessible in different ways; access can
be a function of customer scale or
geography - anything that requires a
different set of activities to reach customers
in the best way.
All positioning is a function of differences on
the supply (activity) side but not necessarily
on the demand (customer) side.

Sustainability of position requires trade-offs

Trade-offs occur when activities are
incompatible; more of one thing requires
less of another
Trade-offs arise for 3 reasons:

inconsistencies in image or reputation

different positions require different activity sets
Internal focus requires priority setting - cant be
all things to all customers successfully

Unique position does not guarantee a

sustainable competitive advantage
Valuable position attracts imitators based
on:

matching superior performance factors.

straddling: match the benefits of a successful
position while maintaining existing position; graft
new features, services, or technologies onto
current activity set.

Positioning trade-offs are essential in

effective strategy:
creates need to choose and purposefully limit
what a company offers
deters straddling or repositioning of rivals as
competitors that engage in these activities
undermine current strategies, degrade value of
existing activities, and spread resources too thin
(trying to be all things to all customers)

The essence of strategy is choosing what

not to do.
Without trade-offs, a sustainable
competitive advantage cannot be achieved.
Strategy is about combining activities
whereas OE is about excellence in individual
activities or functions.

Strategy involves a whole system of

activities, not a collection of parts.
Competitive advantage comes from the way
activities fit and reinforce one another
(think horizontal & process management
here!).
Strategic fit among activity sets locks out
rivals; synergy creates competitive
advantage & superior profitability.

Fit = seeing the company as a system not

just a collection of core competencies,
critical resources, and key success factors.
3 types of strategic fit (the whole matters
more than any individual part):

simple consistency between each activity

(function) and the overall strategy
activities are reinforcing
optimization of effort

As fit becomes more complex (multiple

interrelationships) within a firm, the more
difficult imitation is.
Strategic positioning sets the trade-off rules
that define how individual activities will be
configured and integrated.
Organizational structure, systems, and
processes need to be strategy specific.

Focus on creating distinctiveness

Make tough decisions on trade-offs
Define the companys position
Manage the entire system to create fit
Focus on the long term
Stewardship of corporate strategy