Posted in Marketing & Strategy Articles, Total Reads: 1220
, Published on 02 August 2013
Michael E. Porter in his article “What Is Strategy?” presents the principle of strategy. The article, astutely, draws a line between Operational Effectiveness (OE) and strategy. In layman terms, any practice which manifolds the effectiveness of operational activity and utilizes the inputs in a better way is termed as operational effectiveness. The myriad of activities that fall under the ambit of operational effectiveness seek to perform similar activities in a better way than the competitors. Most of the firms have mastered this art through practices like total quality management, just-in-time, continuous improvement, time-based competition, benchmarking and lean manufacturing. These concepts are different types of quality control techniques introduced first by Japan. And since then, companies across the globe have indulged themselves into rat-race of chasing the operational effectiveness, and at times become oblivious to the reason of their very existence.
Porter says that operational effectiveness is necessary but it is not sufficient in today’s world of changing dynamics. He brings a new concept of strategic positioning which seeks companies to perform different activities from their competitors or perform similar activities differently. While operational effectiveness talks about being the best, strategic positioning talks about being unique. And it is only after a company pulls off both that it can outperform its rivals. Ideally, strategic positioning should determine what operational effectiveness to be employed and not the other way round. But, it seldom happens. Managers get so obsessed with the latter that the former takes the backseat. While OE might help in reducing cost and increasing efficiency, in future such activities can easily be imitated by any other firm, thereby, canceling out the edge a firm earlier had.
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If we try to understand it in practical terms, we can take the case of Indian Aviation industry. In 2003, the industry had observed a major change. Air Deccan introduced “budget flying” where the fares were lowered significantly. Here comes the concept of Theory of the Business as given by Peter F. Drucker in his article. Organizations, usually, make assumptions about the markets. These assumptions can be about customers and rivals, about technology and its dynamics or about company’s strengths and weaknesses. In the case being discussed, Air Deccan challenged these assumptions and came up with a Low Cost Carrier airline (LCC). And since then, the sector is witnessing an intense competition in the LCC segment. The list of budget airlines now has names like SpiceJet, Go Airways, IndiGo and Jet Konnect. With this, we can easily relate to Porter’s idea of doing unique things. Another example is of Intel Corporation where it, along with Microsoft Corporation, introduced the idea of creating standards. From Intel’s perspective, the presence of complementary software has acted as a catalyst for driving demand. Similarly, the Intel’s hardware innovations have always put Microsoft on its toes. And together, they have created a standard in the industry which is unparalleled by their respective competitors.
In the era of globalization, another very relevant concept of strategic management is collusion, which has emerged as guiding tool to reduce industry competitiveness. However, there are negative impacts of collusion as well, if not applied within ethical purview. Indian Health Care industry makes a very appropriate case of it. This industry is perhaps the only industry in which the consumption decision is not in the hands of the consumer, rather, for most of the time, on the hands of doctors or hospitals. This trait is extensively exploited by doctors or hospitals to promote each other through referrals in return for hefty payments from the benefiting party. In this case, the ultimate burden is borne by the consumers in the form of exorbitantly high priced drugs, unnecessary diagnostic tests and in some cases, prolonged hospitalization. There is another link of collusion prevailing in that industry, the one between the doctors and the pharmaceuticals companies. A well known practice performed by a typical pharmaceutical company is the provision of offering incentives to doctors so that they prescribe those companies’ brands of drugs to the patients even though these might be expensive and inappropriate. Ideally, a doctor should have prescribed a drug which is cheapest and most readily available and this would have ensured that consumers derive maximum possible benefits from competition among pharmaceutical companies. But, these companies collude with doctors and try to capture the market through ethically unsound practices. Collusion can be constructive as well. An apparent example is the carbon credit policy for international trading to mitigate the growth in concentration of greenhouse gases.
A particular activity can easily be imitated but a set of activities linked together which form a value chain becomes increasingly difficult for firms to imitate. Competitive advantage, as defined by Pankaj Ghemawat and Jan W. Rivkin in their article “Creating Competitive Advantage”, is about driving a wedge between the willingness to pay a firm generates among buyers and the costs it incurs. Accenture has historically earned returns significantly higher than most of the other large IT services companies. The activities that Accenture undertakes to differentiate itself are its deep legacy, reinforced by research and development, its Knowledge portal, its stringent hiring process, its close relationship with CEOs of global corporations, and its successful attempts to build its brand. No wonder, Accenture has gained the competitive advantage and thus is regarded as a leader in information technology consulting.
Let us now discuss another strategy concept that is bound to take the strategic practices to a different level. It is called Blue Ocean strategy, which is about creating uncontested market spaces to capture new demand and making the competition irrelevant. This concept was introduced by W. Chan Kim and Renee Mauborgne in the book named “Blue Ocean Strategy.” This is in contrast of Porter’s Five Forces which they say is formula to remain in “Red Ocean,” where sharks compete mercilessly. According to them, exceptional business success rides on redefining the terms of competition and moving into the “blue ocean,” where one has the water to oneself. The goal of these strategies is not to kill the competition, but to make it irrelevant. This concept also says that firms should focus less on their competitors and more on alternatives. At the same time, they also should focus less on their customers, and more on non-customers, or potential new customers.
The example of Blue Ocean strategy in India is there in the automobile sector. We are referring to Tata Nano, a small car which created ripples amongst automobile enthusiasts around the world. In an automobile sector, where there are established categories in terms of price and performance, seldom would a company create a discontinuity or alter the way a segment is normally defined. Hence, there was an opportunity to create a blue ocean. Nano was targeted to potential new customers, mostly two-wheelers. Nano, through its value innovation, avoided head-to-head competition with any firm and focused on market reconstruction.
Having discussed all the concepts of strategic management with the references to published articles and appropriate cases, we have gained insights on what one should do. However, Porter, though arguable, says that the essence of strategy is choosing what not to do. There is nothing worse for a firm than to wage a war with a competitor on its ground. For example, if you are in FMCG, you can’t emulate the strategy of HUL on its distribution network and P&G on product innovation. If you are trying to be both, you are probably neither. There is no advantage in being a mediocre.
A company may have to change its strategy if the industry witnesses major structural changes. In fact, new strategic positions, more often than not, are result of such changes. Companies need to constantly define their theory of business. We have the case of Nokia, once the leader in mobile phone industry, which has failed miserably in keeping pace with the changing industry dynamics. Nokia had the scale, the connections with manufacturers, the relationships with operators and the brand strength to outsmart every rival, but its response was snail-paced. There are speculations that even if Nokia Lumia clicks, it is unrealistic for the company to come back anywhere near like the firm it were. One cannot cure a degenerative disease by procrastination, it requires decisive action.