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What is Strategy? Not Operational Effectiveness

February 7th, 2009 | Product Management, Strategy

Source: Elite Consulting Ltd.According to the article from Harvard Business Review, What is Strategy by Michael E. Porter, operational effectiveness is not a strategy. Operational effectiveness combined with a strategy is a path (although not a guarantee) to superior performance.

Porter goes on to say that operational effectiveness is necessary but not sufficient and he describes how a company can be successful if it establishes a difference that it can preserve. Being a cost leader, or operationally efficient, is one way to differentiate from competitors. However, it rarely leads to gains for anyone. Customers get marginal value increases (if any) and you achieve shrinking profits as competitive pressures drive your prices lower. Efficiencies are often easy to imitate.

From a product management perspective, you do not have direct control over many of the cost centers for your product. However, a good product manager will be able to identify the high-value features and avoid the costly ‘mistake’ features. A product strategy and high-value features will justify current price levels and contribute to operational effectiveness (by reducing R&D waste) and lead to a competitive advantage.

Ends up you can control the profit of your product after all.

Image source: Elite Consulting Ltd.
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    • This is one of my favorite business strategy articles. The key takeaway that I took from this article is one that I always fall back on. Strategy is choosing what NOT to do and focusing all activies based on that decision!

      Porter offers the following definition of strategy:
      - Strategy is the creation of a unique and valuable position, involving a different set of activities.
      - Strategy is making trade-offs in competing - choosing what not to do.
      - Strategy is creating fit among a company's activities. The success of strategy depends on doing many things well, not just a few, and integrating among them.

      OE is performing the same things as your competitors, but doing it better. This leads to hypercompetition and commoditization because nobody is differentiated. Companies will get short-term gains from OE, but it doesn't provide sustainable profitability. Competition based on OE is mutually destructive and hurts the entire industry, because everyone is racing down the same path that can't be won because they are continually pushing out the productivity frontier. In the end, the only group that wins from OE is the customer.

      On the other hand, strategic positioning is the key to profitability. By doing different things, or doing the same things differently, competitors can differentiate in a sustainable way. His use of Southwest Airlines as an example was perfect, because most people think that they differentiate through OE. They might have great OE, but this is only a result of their strategic positioning - to serve price and convenience sensitive travellers. They have differentiation from their competitors because they have made choices about what they won't do, based on their strategic positioning. They are focused on their strategic position and this is why they are so successful. Continental tried to straddle their strategy to counter Southwest by introducing Continental Lite, but you can't be focused this way. The tradeoffs required to be successful as a low cost carrier can't be comprimised. Continental could not match up to Southwest because they continued to fly out of busy hub airports and extended their frequent flyer program to Continental Lite. They did not choose not to do these things, a strategic error.
    • Yes, the Southwest piece is an excellent example. I haven't completely digested the full article, it has so much great content that I am taking my time to consume and understand it. More posts to follow.
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