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“What is Strategy?”
Porter, Michael
Harvard Business Review, Nov/Dec96, Vol. 74, No. 6, pp. 61-78

Introduction
Companies must be flexible to respond quickly to competitive and market changes. The two necessary elements of
superior performance are operational effectiveness and strategy. The author first revealed the difference between
operational effectiveness and strategy. He then described the origin of strategic positions. Then, he made clear that in
order to build strategy, one need to make the trade-offs and tighten the fit among activities.
I. Operational Effectiveness is Not Strategy
In order to enhance and improve the operational effectiveness, companies have used a variety of management tools
and techniques (total quality management, benchmarking, time-based competition, outsourcing, partnering,
reengineering, change management). However, these tools failed to provide the company with sustainable
profitability. Thus, the root cause of the problem seems to be failure of management to distinguish between
operational effectiveness and strategy: Management tools have taken the place of strategy.
Operational Effectiveness: Necessary but Not Sufficient
Although both operational effectiveness and strategy are necessary for the superior performance of an organization,
they operate in different ways.
a. Operational effectiveness
Performing similar activities better than rivals perform them. Operational effectiveness includes but is not limited to
efficiency. It refers to many practices that allow a company to better utilize its inputs (e.g., reducing defects in
products or developing products faster). When a company improves its operational effectiveness, productivity frontier
expands. Operational effectiveness is important but it is not sufficient (there is rapid imitation of best practices).
b. Strategy
Performing different activities from rivals’ or performing similar activities in different ways. Porter states that a
company can outperform rivals only if it can establish a difference it can preserve. It must deliver greater value to
customers or create comparable value at a lower cost, or do both. However, Porter argues that most companies today
compete on the basis of operational effectiveness.
II. Strategy Rests on Unique Activities
Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a
unique mix of value. Moreover, the essence of strategy is choosing to perform activities differently than rivals.
Strategy is the creation of a unique and valuable position, involving a different set of activities.
The Origins of Strategic Positions
Strategic positions emerge from three sources, which are not mutually exclusive and often overlap.
1. Variety-based positioning: Produce a subset of an industry’s products or services. It is based on the choice of
product or service varieties rather than customer segments. Thus, for most customers, this type of positioning
will only meet a subset of their needs. It is economically feasible only when a company can best produce
particular products or services using distinctive sets of activities.
2. Needs-based positioning: Serves most or all the needs of a particular group of customers. It is based on
targeting a segment of customers. It arises when there the same customer has different needs on different
occasions or different types of transactions. It arises when there are a group of customers with differing needs,
and when a tailored set of activities can serve those needs best.
3. Access-based positioning: Segmenting customers who are accessible in different ways. However, they
required different activities to reach them. Although their needs are similar to those of other customers, the
best configuration of activities to reach them is different. Access can be a function of customer geography or

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customer scale or of anything that requires a different set of activities to reach customers in the best way.
Segmenting by access is less common and less well understood than the other two bases.
Whatever the basis (variety, needs, access, or some combination of the three), positioning requires a tailored set of
activities because it is always a function of differences in activities (i.e., differences on the supply side). Positioning is
not always a function of difference on the demand (or customer) side.
III. A Sustainable Strategic Position Requires Trade-offs
Choosing a unique position is not enough to guarantee sustainable advantage, as competitors will imitate a valuable
position in one of the two following ways:
1. A competitor can choose to reposition itself to match the superior performer.
2. A competitor can seek to match the benefits of a successful position while maintaining its existing position
(known as straddling).
But a strategic position is not sustainable unless there are be trade-offs with other positions. A trade-off means that
more of one thing necessitates less of another. Trade-offs creates the need for choice and protect against repositioners
and straddlers. Trade-offs arises for three reasons:
1. Inconsistencies in image or reputation. (e.g., a company known for delivering one kind of value may lack
credibility and confuse customers or undermine its own reputation by delivering another kind of value or
attempting to deliver two inconsistent things at the same time).
2. Trade-offs arises from activities themselves. Different positions require different product configurations,
different equipment, different employee behavior, different skills, and different management systems. In
general, value is destroyed if an activity is over designed or under designed for its use.
3. Trade-offs arises from limits on internal coordination and control. By choosing to compete in one way and
not the other, management is making its organizational priorities clear.
Strategy can also be defined as making trade-offs in competing. The essence of strategy is choosing what not to do.
IV. Fit Drives competitive advantage and sustainability
Positioning choices determine not only which activities a company will perform and how it will configure individual
activities but also how activities relate to one another. While operational effectiveness focuses on individual activities,
strategy concentrates on combining activities. Fit is the central component of competitive advantage because discrete
activities often affect one another. Although fit among activities is generic and applies to many companies, the most
valuable fit is strategy-specific because it enhances a position’s uniqueness and amplifies trade-offs. There are three
types of fit, which are not mutually exclusive:
1. First-order fit: Simple consistency between each activity (function) and the overall strategy.
2. Second-order fit: Occurs when activities are reinforcing.
3. Third-order fit: Optimization of effort. Coordination and information exchange across activities to eliminate
redundancy and minimize wasted effort are the most basic types of effort optimization.
In all three types of fit, the whole matters more than any individual part. Competitive advantage stems from the
activities of the entire system. The fit among activities substantially reduces cost or increases differentiation. Strategic
fit is fundamental not only to competitive advantage but also to the sustainability of that advantage because it is harder
for a competitor to match an array of interlocked activities than it is merely to replicate an individual activity. Thus,
positions built on systems of activities are far more sustainable than those built on individual activities.
Thus, strategy is creating fit among a company’s activities (doing many things well in an integrated way).
V. Rediscovering Strategy
The Failure to Choose (Imitating everything is not a choice)
Although external changes can pose a threat to a company’s strategy, the greater threat to strategy often comes from
within the company. Moreover, the fundamental problem lies in the "best-practice" mentality of the managers, who
believe in making no trade-offs, incessantly pursuing operational effectiveness, and imitating competitors to catch up
in the race for operational effectiveness. Thus, managers simply do not understand the need to have a strategy.

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The Growth Trap

Among all other influences, the desire to grow has perhaps the most perverse effect on strategy. Compromises and
inconsistencies in the pursuit of growth eventually erode the competitive advantage of a company and their
uniqueness.
Profitable Growth
According to Porter, efforts to grow blur uniqueness, create compromises, reduce fit, and ultimately undermine
competitive advantage. Companies should concentrate on deepening competitive position by making the company's
activities more distinctive, strengthening the 'fit' and better meet needs. Globalization often allows growth that is
consistent with a company’s strategy, as it opens larger markets for a focused strategy. Thus, expanding globally is
more likely to reinforce a company’s unique position than broadening domestically.
The Role of Leadership
Leadership is defining and communicating the company's unique position; making trade-offs and forging the fit
among activities. Leaders must provide discipline to decide and to say NO to ideas and initiatives that do not fit the
strategy. Strategy is about choosing what to do as well as what not to do. Thus, strategy requires continuous discipline
and clear communication. Managers need to understand that operational effectiveness, although a necessary part of
management is not strategy.
VI. Conclusion
Strategic continuity does not imply a static view of competition. A company must continually improve its operational
effectiveness and actively try to shift the productivity frontier; at the same time, there needs to be ongoing effort to
extend its uniqueness while strengthening the fit among its activities. However, a company may have to change its
strategic position due to a major structural change in the industry. A company should choose its new position
depending on its ability to find new trade-offs and leverage a new system of complementary activities into a
sustainable advantage. Strategic positioning is often not obvious, and finding them requires creativity and insight.
New entrants often discover unique positions that have been available but simply overlooked by established
competitors.

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