Operational Effectiveness vs Strategy part1

Today I have been... 

Reading Michael Porter's article "What is strategy" in the reader

Why? 

It's required reading, and the course text u1s3.2p18 asks questions about it.

So What?

First a summary of the article.

Operational effectiveness and Strategy are not the same thing.

Operational effectiveness (OE) is doing the same thing better than your competitors. Strategic positioning is doing different things to competitors, or similar things in different ways.

To outperform rivals requires either delivering more value (allowing you to charge more) or deliver the same value at lower cost, both allowing better profitability.

The cost or price of what you produce is governed by the many activities required to bring the product to market. Costs are incurred while performing activities and cost advantage comes from performing them more efficiently than competitors. This is operational effectiveness.

Differentiation is obtained through the choice of activities and how they are performed.

Japanese companies became hugely successful in the 1980s thanks to operational effectiveness. They fought off rivals by being able to offer comparable or better quality at lower or comparable prices, through huge cost efficiency.

The productivity frontier? The sum of all existing best practices at a given point in time. The theoretical "best you can possibly do". The maximum value you can create using the best of everything. When you improve operational effectiveness you get nearer this frontier.

This frontier moves outward as new technologies, approaches and inputs are available (eg software, production techniques etc).

There's not always a tradeoff between cost and quality (defects) as they can be illusions created by poor OE.

OE alone is not a sustainable way to stay ahead. Most ways to achieve OE can be imitated by competitors.

Competition through OE moves the frontier further away in itself. As an example of this, if a company is able to cut costs through OE, competitors will follow suit sooner or later. When this happens any brief cost advantage is eroded as price competition heats up and superior profitability vanishes. Any money made is likely re-invested in eg better machinery etc which demonstrates a great RoI. The improved machinery increases the maximum value you can create using the best of everything, the frontier moves and the cycle repeats itself. Profits margins are seen to slowly decline over time; this has been seen in many industries.

There is another reason OE alone is insufficient. The more benchmarking, outsourcing etc that is done, the more those particular activities become generic. Companies end up with fewer areas they can achieve OE and "competition becomes a series of races down identical paths that no-one can win". Competing using OE alone is mutually destructive!

Porter argues that mergers and consolidation happen because of OE. Performance pressures lead companies to buy out their rivals to reduce competition as that ends up being the only idea or option. Those remaining didn't necessarily have real advantage, they just outlasted the others. Eating the competition was the only way out and the phrase dog-eat-dog seems very appropriate!

Strategy is achieved through being different, rather than better at the same thing. Southwest airlines pioneered the low-cost airline model and no other airline could compete not just because their cost base was lower but because they offered a different proposition. Likewise with Ikea compared to traditional furniture stores.

...continued