Michael Porter's Big Ideas

There's a fundamental distinction between strategy and operational effectiveness. Strategy is about making choices, trade-offs; it's about deliberately choosing to be different. Operational effectiveness is about things that you really shouldn't have to make choices on; it's about what's good for everybody and about what every business should be doing.

Lately, leaders have tended to dwell on operational effectiveness. Again, this has been fed by the business literature: the ideas that emerged in the late 1980s and early 1990s, such as total quality, just-in-time, and reengineering. All were focused on the nitty-gritty of getting a company to be more effective. And for a while, some Japanese companies turned the nitty-gritty into an art form. They were incredibly competitive.

Japan's obsession with operational effectiveness became a huge problem, though, because only strategy can create sustainable advantage. And strategy must start with a different value proposition. A strategy delineates a territory in which a company seeks to be unique. Strategy 101 is about choices: You can't be all things to all people.

The essence of strategy is that you must set limits on what you're trying to accomplish. The company without a strategy is willing to try anything. If all you're trying to do is essentially the same thing as your rivals, then it's unlikely that you'll be very successful. It's incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long. That's especially true today, when the flow of information and capital is incredibly fast. It's extremely dangerous to bet on the incompetence of your competitors -- and that's what you're doing when you're competing on operational effectiveness.

What's worse, a focus on operational effectiveness alone tends to create a mutually destructive form of competition. If everyone's trying to get to the same place, then, almost inevitably, that causes customers to choose on price. This is a bit of a metaphor for the past five years, when we've seen widespread cratering of prices.

There have been those who argue that in this new millennium, with all of this change and new information, such a form of destructive competition is simply the way competition has to be. I believe very strongly that that is not the case. There are many opportunities for strategic differences in nearly every industry; the more dynamism there is in an economy, in fact, the greater the opportunity. And a much more positive kind of competition could emerge if managers thought about strategy in the right way.

Technology changes, strategy doesn't.

The underlying principles of strategy are enduring, regardless of technology or the pace of change. Consider the Internet. Whether you're on the Net or not, your profitability is still determined by the structure of your industry. If there are no barriers to entry, if customers have all the power, and if rivalry is based on price, then the Net doesn't matter -- you won't be very profitable.

Sound strategy starts with having the right goal. And I argue that the only goal that can support a sound strategy is superior profitability. If you don't start with that goal and seek it pretty directly, you will quickly be led to actions that will undermine strategy. If your goal is anything but profitability -- if it's to be big, or to grow fast, or to become a technology leader -- you'll hit problems.

Finally, strategy must have continuity. It can't be constantly reinvented. Strategy is about the basic value you're trying to deliver to customers, and about which customers you're trying to serve. That positioning, at that level, is where continuity needs to be strongest. Otherwise, it's hard for your organization to grasp what the strategy is. And it's hard for customers to know what you stand for.

Strategy hasn't changed, but change has.

On the other hand, I agree that the half-life of everything has shortened. So setting strategy has become a little more complicated. In the old days, maybe 20 years ago, you could set a direction for your business, define a value proposition, then lumber along pursuing that. Today, you still need to define how you're going to be distinctive. But we know that simply making that set of choices will not protect you unless you're constantly sucking in all of the available means to improve on your ability to deliver.

So companies have to be very schizophrenic. On one hand, they have to maintain continuity of strategy. But they also have to be good at continuously improving. Southwest Airlines, for example, has focused on a strategy of serving price-minded customers who want to go from place to place on relatively short, frequently offered flights without much service. That has stayed consistent over the years. But Southwest has been extremely aggressive about assimilating every new idea possible to deliver on that strategy. Today, it does many things differently than it did 30 years ago -- but it's still serving essentially the same customers who have essentially the same needs.