What Is Strategy?

partnering,

reengineering,

change management.

Although

the

resulting operational

improvements

have often

been dramatic, many companies have

been frustrated by their inability to

translate those gains into sustainable profitability.

And bit by bit, almost imperceptibly, management

tools have taken the place of strategy. As managers

push to improve on all fronts, they move farther

away

from viable competitive positions.

Operational Effectiveness:

Necessary but Not Sufficient

Operational effectiveness and strategy are both

essential to superior performance, which, after all,

is the primary goal of any enterprise. But they work

in very different ways.

Michael E. Porter is the C. Roland Christensen Professor

of Business Administration at the Harvard Business

School in Boston, Massachusetts.

HARVARD BUSINESS REVIEW November-December 1996

Copyright © 1996 by the President and Fellows of Harvard College. All rights reserved.

A company can outperform rivals only if it can

establish a difference that it can preserve. It must

deliver greater value to customers or create comparable

value at a lower cost, or do both. The arithmetic

of superior profitability then follows: delivering

greater value allows a company to charge higher

average

unit prices; greater

efficiency results in

lower

average unit costs.

Ultimately, all differences between companies in

cost or price derive from the hundreds of activities

required to create, produce, sell, and deliver their

products or services, such as calling on customers,

assembling final products, and training employees.

Cost is generated by performing activities, and cost

advantage arises from performing particular activities

more efficiently than competitors. Similarly,

differentiation

arises from both the choice of activities

and how they are performed.

Activities, then,

are

the basic units of competitive advantage. Overall

advantage or disadvantage results

from all a

company’s

activities, not only a few.

1

Operational effectiveness (OE) means performing

similar activities better than rivals perform them.

Operational effectiveness includes but is not limited

to efficiency.

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