Strategy is Not Operational Effectiveness

1. Michael Porter - Strategy is
Not Operational Effectiveness
By
Dr. Michael McDermott
mcdermottm1@nku.edu

2. Structure
1. Common mistakes in discussing strategy
2. The Limited Advantages of Being Better –
Operational Effectiveness
3. The Significant Advantages of Being Smarter –
Genuine Strategy
4. Smarter can beat Better
5. The Critical and Sustainable Advantages of Being
Better and Smarter – Operational Effectiveness
and Genuine Strategy
6. Smarter and Better is Invincible
© McDermott, 2014.
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3. Common mistakes in discussing strategy
• Many people, including executives, often make
the mistake of equating operational effectiveness
with strategy:
• Strategy is not:
– transferring production to a lower cost location; or,
– Increasing productivity; or,
– Lowering costs
• Improving operational effectiveness is great, but
it’s not strategy
© McDermott, 2014.
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4. What is Operational Effectiveness (OE)?
• It’s all about internal performance
• It’s about being:
– Better, or
– Cheaper, or
– Faster, or
– Wider (i.e. more international)
© McDermott, 2014.
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5. Nature and Limitations of Operational
Effectiveness
Nature of OE
Implications
• OE means performing
similar activities better
than rivals perform
them
• Constant improvement or
getting better is seldom
sufficient for profitability
• Constant improvement
in operational
effectiveness is
necessary to achieve
superior profitability.
• And that is tough – hence
many companies exit an
industry where they have
exhausted all possibilities
© McDermott, 2014.
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6. Operational Effectiveness
Constant
improvement
Being Better
© McDermott, 2014.
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7. Operational Effectiveness
Law of
Diminishing
Returns and
Others
Narrow Gap
Constant
Improvement
For example, the success of many Japanese companies was based upon being better
and cheaper. But you can see that they are seeing their advantage eroded (i.e. South Koreans)
© McDermott, 2014.
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8. Nature and Limitations of Operational
Effectiveness
Nature of OE
Limitations of OE
• OE means performing
similar activities better
than rivals perform
them
• Constant improvement or
getting better is seldom
sufficient for profitability
• Constant improvement
in operational
effectiveness is
necessary to achieve
superior profitability.
• And that is tough – hence
many companies exit an
industry where they have
exhausted all possibilities
© McDermott, 2014.
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9. The Limitations of OE
• Those who rely exclusively upon OE are
quickly overtaken
• Just think of the TV, PC industries
– Japanese topple US and Europeans
– South Koreans/Taiwanese topple US and Japanese
– Will Chinese topple South Korean and Taiwanese?
© McDermott, 2014.
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10. Operational Effectiveness Explains Initial
Success of Asian Companies
1960s-80s
Japanese
companies
are winners
1990s-2010s
South
Korean
companies
are winners
© McDermott, 2014.
2020sChinese
companies
are winners
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11. Operational Effectiveness May Deliver
Advantage Briefly
Being
Better
Operational
Effectiveness
© McDermott, 2014.
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12. Operational Effectiveness May Deliver
Advantage Briefly
Temporary
Competitive
Advantage
Operational
Effectiveness
© McDermott, 2014.
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13. Running out of steam:
the limitations of OE
• Companies that are copycats simply exploiting differences
in operational efficiency soon come undone;
• Once gaps in OE narrow, such companies struggle;
• Because they lack a distinct competitive position.
• In short, they need to learn strategy!
• In Porter’s terms they need to develop a unique
competitive position
© McDermott, 2014.
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14. Japanese Winners in the Past
According to Porter, since they
were better, they did not need to
be smarter
© McDermott, 2014.
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15. © McDermott, 2014.
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16. Surely they were more than just Better?
• In the 1980s-1990s, Sony was “the Apple” of today.
• Surely it was “smarter”, rather than just better?
• What’s the difference between Sony then and Apple
today?
• Both made great products that are “better”, but Apple
realized that its focus needs to be the consumer
experience not simply the products.
• Apple’s success may reflect a total customer-centric
business model – that is “smarter”;
• Sony’s focus was, and appears to remain, simply
offering “better” products.
© McDermott, 2014.
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17. Future Japanese Winners Must Also
Be Smarter
Do they
have
genuine
strategy?
© McDermott, 2014.
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18. The Porter “Doctrine”: Genuine Strategy and
Operational Effectiveness Deliver Enduring
Competitive Advantage
2013 Rita McGrath book is The
End of Competitive Advantage
Genuine
Strategy
Operational
Effectiveness
Sustainable
Competitive
Advantage
I am not sure that any competitive
advantage is sustainable
© McDermott, 2014.
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19. Genuine Strategy and OE
Both are essential for superior performance
Excellence in one is not enough for enduring
success or competitive advantage
© McDermott, 2014.
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20. Establishing Competitive Advantage
1
2
• Deliver greater value to customers;
• Kroger, Meijer, Netflix, Nike, Under Armor
• Create comparable value at lower prices;
• Coinstar, Dell, Samsung, Vizio
• Do both
3
© McDermott, 2014.
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21. Creating Competitive Advantage:
Effectiveness vs Efficient
More
Effective
More
Efficient
• Leads to greater valuecreation
• Higher unit prices
• Apple, BMW
• Leads to Lower unit costs
• Can offer lowest prices
• Costco, Lenovo
© McDermott, 2014.
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22. Creating Competitive Advantage:
Effectiveness vs Efficient
More
Effective
More
Efficient
• Results in
differentiation
competitive advantage
• Results in lowest cost
competitive advantage
© McDermott, 2014.
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23. OE and Buyers
• Continuous improvements in OE proves of
enormous benefits to buyers;
– Today we can buy a USB stick at Wal-mart for less than
$5 that has more memory than a computer that cost
$000s in the 1980s;
• But this is a nightmare scenario for companies
that are sucked into damaging price wars;
– Who makes a profit as a PC producer today?
© McDermott, 2014.
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24. © McDermott, 2014.
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25. Examples of Strategically Smart
The Smarts
The Laggards
• Tend to be ‘different’
• Are innovative
• Imitate and emulate their
national rivals
© McDermott, 2014.
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26. OE and Competition
• Companies converge
• They all follow the exact same strategic path
– From “made-in-China” to “sold-in-Wal-mart”
• And this is a race that no producer wins
– So let’s reduce the number of ‘runners’ – and
acquire our rivals
• In a ‘buy or be bought’ world, no one enjoys
true competitive advantage
© McDermott, 2014.
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27. It does not
have to be
this way!
© McDermott, 2014.
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28. Competitive Strategy is
about being different!
© McDermott, 2014.
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29. Determining Strategic Position
• Perform similar activities differently
Activities • Or perform different activities
Value
• Deliver a unique mix of value
© McDermott, 2014.
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30. © McDermott, 2014.
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31. What do those on previous slide
offer?
• Often low cost
• Because they do things differently
• But in addition to that they often ‘break the
rules’ in order to better meet the needs of
their target market
© McDermott, 2014.
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32. © McDermott, 2014.
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33. What do those on previous slide
offer?
• Often differentiation
• Because they do things better
• But in addition to that they often ‘break the
rules’ in order to better meet the needs of
their target market
© McDermott, 2014.
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34. Nature of Strategic Positioning
• Means performing different activities from
rivals or performing similar activities in
different ways
• Competitive advantage requires developing a
distinct strategic position
© McDermott, 2014.
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35. What’s the Solution to Developing
Good Strategy?
1.
According to Porter, it’s focusing upon creating a strong competitive position (i.e.
developing a strategy) and then milking it;
2.
Kim & Mauborgne suggest that the solution is developing a Blue Ocean Strategy
3.
Rumelt suggests that the company must focus all energies on its “big issue”
problem
4.
Montgomery emphasizes the CEO as the “Guardian angel” of company strategy
5.
Lafley and Martin stress it’s making tough choices
6.
McGrath stresses that it’s the ability to “ride the waves” – knowing when to get
off and get on many waves…knowing that some “rides” are a “success” and
others a “disappointment”.
© McDermott, 2014.
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