What Is Strategy? - Michael Porter

Michael Porter (1996) states that a company can outperform rivals only if it can establish a difference that it can preserve. It must either deliver a greater value to its customers or create a comparable value at a lower cost compared to its rivals. Delivering a greater value means charging higher average unit prices; whereas lower average cost for the company can be achieved by increased efficiency. The superior profitability then follows as a result.

Porter breaks down the operations of a company into activities. All the differences between companies in cost or price arise from the hundreds of activities required to create, product, sell and distribute their products or services. The cost of an output delivered to customers is generated by the activities and affected how efficiently these activities are performed. As a result, cost advantage arises from performing particular activities more efficiently than competitors.

Operational effectiveness is described by Porter (1996) as means of performing similar activities better than rivals perform them. Operational effectiveness is the sum of practices that allow a company better utilize its inputs. Constant improvement in operation efficiency is necessary to achieve superior profitability.

However, a company cannot compete successfully in the long run only by focusing on operational effectiveness. Any best practice is easily imitated and competitive convergence causes companies perform same activities in identical ways. Consequently, efficiency throughout the industry increases but leaves any distinct company without a comparative advantage.

Differentiation and Strategic Positioning

Differentiation also arises from both the choice of activities to produce and output and how these activities are performed. Activities are basic units of competitive advantage and all advantage or disadvantage results from not a subset but all of the activities of the company.

Porter (1996) defines competitive strategy to choose a different set of activities to deliver a unique mix of value. Strategy is built upon the activities either by choosing a different set of them or performing the similar set differently than the competitors.

In order to create a differentiation, a company can select a different positioning in the market. This positioning may depend on producing a selected subset of products and services of an industry where the company has advantages; meeting the needs of only specific segment of customers in a market which is divided among different segments or serve to customers who are reached by the companies differently.

Variety, needs or access can provide a basis for positioning and sometimes they may overlap and a combination of three different positioning can be applied by a company. Strategic positioning is always a function of the differences on the supply side and so it requires a different

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