Suppose you are put on a committee to evaluate some element of your company’s strategy and to make recommendations to management. In these times of rapid-and disruptive-change in virtually every business field, having a focus on strategy is critical for the success of any business. One of the best-known experts on Strategy is Michael E. Porter and his article, “What is Strategy?” is iconic. This is a brief summary of the article (Harvard Business Review, 1996).
Porter makes a clear distinction between what he calls “Operational Effectiveness” producing your core products better, faster or with fewer inputs and defects, and strategy. Strategy or strategic positioning attempts to achieve a sustainable competitive advantage by either performing different activities from rivals or performing similar activities in different ways. Porter identifies three key principles that underlie strategic position.
First, is the creation of a unique and valuable position, involving a different set of activities. Strategic positionings are often not obvious and finding them requires creativity and insight. They require a clear understanding of the business target market. Strategic positions can become available due to:
- Change [new needs, new customer groups]-(Example: 75% of the U.S. population now live in urban areas-Amazon Direct delivers food to your home)
- Unique positions that have been available but overlooked by established competitors (Example: Southwest Airlines-details to follow)
- Occupying a position that a competitor once held but has ceded (Example-Ikea, which took over the low-cost furniture business).
Take the example of Southwest Airlines which was formed in 1971 and created a valuable position by differing significantly from full-service airlines. It offered short-haul, point-to-point, low-cost service between midsize cities and secondary airports in large cities. Through fast turnarounds at the gate, Southwest was able to keep planes flying longer hours than rivals with frequent departures and fewer aircraft. Costs were further reduced by not having baggage transfer fees (no connections), no meals and no assigned seating. Using one type of aircraft made repairs cheaper and pilots didn’t have to adjust to different types of equipment.
Second, a unique position is not enough to guarantee a sustainable advantage. The marketplace is moving too fast. Strategy requires you to make trade-offs in competing-to choose what not to do in order to fend off imitators or “straddlers” (competitors who keep their own product lines and imitate yours). This sounds simple but is difficult and requires clear knowledge of your business principles and the needs of your client base. Trade-offs problems arise for four reasons:
- Inconsistencies arise in image or reputation: a company known for delivering one kind of value may lack credibility and confuse customers when entering a new market
- Different positions (with their tailored activities): requires different product configurations, equipment, skills, employee behavior and management systems
- Overdesigned or under-designed activities: services that are too elaborate for the cost or don’t produce what the customer expects
- Placing limits on internal coordination and control: too often limits are not placed because management did not say “NO”.
Continental, a full-service airline, tried to copy the Southwest low-cost strategy with Continental Lite due to Southwest’s success. However, the lack of understanding of trade-offs ultimately sunk Continental Lite because they tried to mesh two businesses with different underlying principles and synergies. Full-service airlines follow a hub and spokes models with the hub being a major city, which is designed to serve a large number of destinations and serve passengers with connecting flights. To attract passengers who desire more comfort, they offer first-class or business-class service. To accommodate passengers who must change planes, they coordinate schedules and check and transfer baggage. Because some passengers will be traveling many hours, they serve meals.
In their thirst for easy profits Continental Lite tried to compete with Southwest. Although it eliminated meals, first-class service and shortened turnaround time at the gate, many of the necessary trade-offs were never considered. Continental Lite’s planes were delayed leaving congested hub cities, there were poor baggage transfers, it could not compete on price and still pay standard travel-agent commissions to its full-service agents. And these were only a few of the problems. The business was closed and Continental lost hundreds of millions of dollars and the CEO lost his job.
Third, strategy involves creating “fit” among a company’s activities. Fit has to do with the ways a company’s activities interact and reinforce one another. Fit drives both competitive advantage and sustainability: when activities mutually reinforce each other, competitors can’t easily imitate them. There are three types of fit, although they are not mutually exclusive:
- Simple consistency: creates 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. It makes the strategy easier to communicate to customers, employees, and shareholders, and improves implementation through single-mindedness in the corporation.
- Second-order fit: occurs when activities are reinforcing: Southwest, as we have seen, was built on a very simple model of short haul, point-to-point, low-cost service and management doggedly stuck with the model.
- Third-order fit: goes beyond activity reinforcement to optimization of effort: this involves coordination and information exchange across all or most activities to eliminate redundancy and minimize wasted effort. It may also involve product design choices which can eliminate the need for after-sale service or make it possible for customers to perform service activities themselves. The fact that Southwest used the same aircraft meant reduced maintenance fees, simplified pilot training, and great flexibility in scheduling.
Strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability of that advantage. It is harder for a rival to match an array of interlocking activities than it is merely to imitate a particular sales-force approach, match a process technology, or replicate a set of product features. Positions built on systems of activities are far more sustainable than those built on individual activities.
Southwest built a successful business model, initially, on a number of interlocking activities. Some of them included:
- Limited passenger service
- Short-haul, point-to-point routes between midsize cities and secondary airports
- Very low ticket prices
- High aircraft utilization
- Lean, highly productive ground and gate crews
- Frequent, reliable departures, 15-minute gate turnarounds
- No meals or seat assignments
- No connections with other airlines
- Standardized fleet of 737 aircraft
- No baggage transfers.
While Southwest’s basic principles have remained consistent there have been some changes through the years. It is, however, easy to see how this model would not be easy for an existing competitor to copy.
Finally, the threats to strategy are seen to emanate from outside a company because of changes in technology or the behavior of competitors. Although external changes can be the problem, the greater threat to strategy often comes from within. A sound strategy can be undermined by a misguided view of competition, by organization failures or the desired to grow. Perhaps the desire to grow has the most negative effect on strategy. Trade-offs and limits appear to constrain growth and those who seek growth may start to cut corners. Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage a company had with its original varieties or target customers. It falls to leadership to set the boundaries and to ensure that strategy is not eroded.
Management’s core function is strategy: defining and communicating the company’s unique position making trade-offs and forging fit among activities. Strategy renders choices about what not to do as important as choices about what to do. Improving operational effectiveness (the relentless effort to achieve best practice in the core business) is a necessary, and important activity, but it comes after the strategy is set.