strategy is not operational effectiveness

Strategy is Not Operational

Effectiveness

By

Dr. Michael McDermott

mcdermottm1@nku.edu

Structure

1. Common mistakes in discussing strategy 2. The Limited Advantages of Being Better –

Operational Effectiveness 3. The Significant Advantages of Being Smarter –

Genuine Strategy 4. Smarter can beat Better 5. The Critical and Sustainable Advantages of Being

Better and Smarter – Operational Effectiveness and Genuine Strategy

6. Smarter and Better is Invincible 2 © McDermott, 2012.

Common mistakes in discussing strategy

• Many people, including executives, often make the mistake of equating operational effectiveness with strategy:

• Strategy is not:

– transferring production to a lower cost location; or,

– Increasing productivity; or,

– Lowering costs

• Improving operational effectiveness is great, but it’s not strategy

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What is Operational Effectiveness (OE)?

• It’s all about internal performance

• It’s about being:

– Better, or

– Cheaper, or

– Faster, or

– Wider (i.e. more international)

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Nature and Limitations of Operational Effectiveness

Nature of OE

• OE means performing

similar activities better than rivals perform them

• Constant improvement

in operational effectiveness is necessary to achieve superior profitability.

Implications

• Constant improvement or

getting better is seldom sufficient for profitability

• And that is tough – hence many companies exit an industry where they have exhausted all possibilities

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Operational Effectiveness

Being Better Constant

improvement

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Operational Effectiveness

Constant Improvement

Law of Diminishing Returns and

Others Narrow Gap

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For example, the success of many Japanese companies was based upon being better and cheaper. But you can see that they are seeing their advantage eroded (i.e. South Koreans)

Nature and Limitations of Operational Effectiveness

Nature of OE

• OE means performing

similar activities better than rivals perform them

• Constant improvement

in operational effectiveness is necessary to achieve superior profitability.

Limitations of OE

• Constant improvement or

getting better is seldom sufficient for profitability

• And that is tough – hence many companies exit an industry where they have exhausted all possibilities

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The Limitations of OE

• Those who rely exclusively upon OE are quickly overtaken

• Just think of the TV, PC industries

– Japanese topple US and Europeans

– South Koreans/Taiwanese topple US and Japanese

– Will Chinese topple South Korean and Taiwanese?

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Operational Effectiveness Explains Initial Success of Asian Companies

1960s-80s Japanese companies are winners

1990s-2010s South Korean companies are winners

2020s- Chinese companies are winners

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Operational Effectiveness

Being Better

Operational Effectiveness May Deliver Advantage Briefly

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Operational Effectiveness

Temporary Competitive Advantage

Operational Effectiveness May Deliver Advantage Briefly

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Running out of steam: the limitations of OE

• Companies that are copycats simply exploiting differences in operational efficiency soon come undone;

• Once gaps in OE narrow, such companies struggle;

• Because they lack a distinct competitive position.

• In short, they need to learn strategy!

• In Porter’s terms they need to develop a unique competitive position

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Japanese Winners in the Past

According to Porter, since they were better, they did not need to

be smarter

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Surely they were more than just Better?

• In the 1980s-1990s, Sony was “the Apple” of today. • Surely it was “smarter”, rather than just better? • What’s the difference between Sony then and Apple

today? • Both made great products that are “better”, but Apple

realized that its focus needs to be the consumer experience not simply the products.

• Apple’s success may reflect a total customer-centric business model – that is “smarter”;

• Sony’s focus was, and appears to remain, simply offering “better” products.

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Future Japanese Winners Must Also Be Smarter

Do they have

genuine strategy?

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Genuine

Strategy Operational

Effectiveness

Sustainable

Competitive Advantage

Genuine Strategy and Operational Effectiveness Deliver

Enduring Competitive Advantage

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I am not sure that any competitive advantage is sustainable

Genuine Strategy and OE

Both are essential for superior performance

Excellence in one is not enough for enduring success or competitive advantage

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Establishing Competitive Advantage

1 • Deliver greater value to customers;

• Kroger, Meijer, Netflix, Nike, Under Armor

2 • Create comparable value at lower prices;

• Coinstar, Dell, Samsung, Vizio

3

• Do both

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Creating Competitive Advantage: Effectiveness vs Efficient

• Leads to greater value-creation

• Higher unit prices

• Apple, BMW

More Effective

• Leads to Lower unit costs

• Can offer lowest prices

• Costco, Lenovo

More Efficient

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OE and Buyers

• Continuous improvements in OE proves of enormous benefits to buyers; – Today we can buy a USB stick at Wal-mart for less than

$5 that has more memory than a computer that cost $000s in the 1980s;

• But this is a nightmare scenario for companies that are sucked into damaging price wars; – Who makes a profit as a PC producer today?

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Examples of Strategically Smart

The Smarts

• Tend to be ‘different’

• Are innovative

The Laggards

• Imitate and emulate their national rivals

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OE and Competition

• Companies converge

• They all follow the exact same strategic path

– From “made-in-China” to “sold-in-Wal-mart”

• And this is a race that no producer wins

– So let’s reduce the number of ‘runners’ – and acquire our rivals

• In a ‘buy or be bought’ world, no one enjoys true competitive advantage

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It does not have to be this way!

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Competitive Strategy is about being different!

Determining Strategic Position

Activities

• Perform similar activities differently

• Or perform different activities

Value • Deliver a unique mix of value

What do they offer?

• Often low cost

• Because they do things differently

• But in addition to that they often ‘break the rules’ in order to better meet the needs of their target market

Nature of Strategic Positioning

• Means performing different activities from rivals or performing similar activities in different ways

• Competitive advantage requires developing a distinct strategic position

What’s the Solution?

• According to Porter, it’s focusing upon creating a strong competitive position (i.e. developing a strategy)

• Kim & Mauborgne suggest that the solution is developing a Blue Ocean Strategy

• Rumelt suggests that the company must focus all energies on its “big issue” problem

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