Table Of Contentwww.hbr.org
HBR’s Must-Reads
ARTICLE COLLECTION
If you read nothing else on on Strategy
strategy, read these best-
selling articles.
Included with this collection:
Strategy Development
2 What Is Strategy?
by Michael E. Porter
23 The Five Competitive Forces That Shape Strategy
by Michael E. Porter
42 Building Your Company’s Vision
by James C. Collins and Jerry I. Porras
57 Reinventing Your Business Model
by Mark W. Johnson, Clayton M. Christensen,
and Henning Kagermann
69 Blue Ocean Strategy
by W. Chan Kim and Renée Mauborgne
Strategy Execution
81 The Secrets to Successful Strategy Execution
by Gary L. Neilson, Karla L. Martin, and Elizabeth Powers
95 Using the Balanced Scorecard as a Strategic Management System
by Robert S. Kaplan and David P. Norton
110 T ransforming Corner-Office Strategy into Frontline Action
by Orit Gadiesh and James L. Gilbert
121 T urning Great Strategy into Great Performance
by Michael C. Mankins and Richard Steele
133 W ho Has the D?: How Clear Decision Roles Enhance
Organizational Performance
by Paul Rogers and Marcia Blenko
Product 12601
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What Is Strategy?
by Michael E. Porter
Included with this full-text Harvard Business Review article:
3 Article Summary
The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work
4 What Is Strategy?
22 Further Reading
A list of related materials, with annotations to guide further
exploration of the article’s ideas and applications
Reprint 96608
What Is Strategy?
The Idea in Brief The Idea in Practice
The myriad activities that go into creating, Three key principles underlie strategic positioning.
producing, selling, and delivering a product
1. Strategy is the creation of a unique and 3. Strategy involves creating “fit” among a
or service are the basic units of competitive
valuable position, involving a different set company’s activities. Fit has to do with the
advantage. Operational effectiveness
of activities. Strategic position emerges from ways a company’s activities interact and rein-
means performing these activities better—
three distinct sources: force one another. For example, Vanguard
that is, faster, or with fewer inputs and
Group aligns all of its activities with a low-cost
defects—than rivals. Companies can reap • serving few needs of many customers (Jiffy
strategy; it distributes funds directly to con-
enormous advantages from operational ef- Lube provides only auto lubricants)
sumers and minimizes portfolio turnover. Fit
fectiveness, as Japanese firms demon-
• serving broad needs of few customers drives both competitive advantage and sus-
strated in the 1970s and 1980s with such
(Bessemer Trust targets only very high- tainability: when activities mutually reinforce
practices as total quality management and
wealth clients) each other, competitors can’t easily imitate
continuous improvement. But from a com-
them. When Continental Lite tried to match a
petitive standpoint, the problem with oper- • serving broad needs of many customers
few of Southwest Airlines’ activities, but not
ational effectiveness is that best practices in a narrow market (Carmike Cinemas op-
the whole interlocking system, the results
are easily emulated. As all competitors in an erates only in cities with a population
were disastrous.
industry adopt them, the productivity under 200,000)
frontier—the maximum value a company Employees need guidance about how to
2. Strategy requires you to make trade-offs
can deliver at a given cost, given the best deepen a strategic position rather than
in competing—to choose what not to do.
available technology, skills, and manage- broaden or compromise it. About how to ex-
Some competitive activities are incompatible;
ment techniques—shifts outward, lowering tend the company’s uniqueness while
thus, gains in one area can be achieved only
costs and improving value at the same strengthening the fit among its activities. This
at the expense of another area. For example,
time. Such competition produces absolute work of deciding which target group of cus-
Neutrogena soap is positioned more as a me-
improvement in operational effectiveness, tomers and needs to serve requires discipline,
dicinal product than as a cleansing agent. The
but relative improvement for no one. And the ability to set limits, and forthright commu-
company says “no” to sales based on deodor-
the more benchmarking that companies nication. Clearly, strategy and leadership are
ED. do, the more competitive convergence izing, gives up large volume, and sacrifices inextricably linked.
RV manufacturing efficiencies. By contrast, Maytag’s
SE you have—that is, the more indistinguish-
RE decision to extend its product line and ac-
S able companies are from one another.
HT quire other brands represented a failure to
G
RI Strategic positioning attempts to achieve make difficult trade-offs: the boost in reve-
N. ALL sustainable competitive advantage by nues came at the expense of return on sales.
O
TI preserving what is distinctive about a com-
A
OR pany. It means performing different activi-
P
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O ties from rivals, or performing similar activi-
C
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© 2000
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page 3
What Is Strategy?
by Michael E. Porter
I. Operational Effectiveness Is Not hypercompetition is a self-inflicted wound, not
Strategy the inevitable outcome of a changing paradigm
For almost two decades, managers have been of competition.
D.
VE learning to play by a new set of rules. Compa- The root of the problem is the failure to dis-
R
E
ES nies must be flexible to respond rapidly to tinguish between operational effectiveness and
R
TS competitive and market changes. They must strategy. The quest for productivity, quality, and
H
RIG benchmark continuously to achieve best prac- speed has spawned a remarkable number of
ALL tice. They must outsource aggressively to gain management tools and techniques: total quality
N.
O efficiencies. And they must nurture a few core management, benchmarking, time-based com-
TI
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R competencies in race to stay ahead of rivals. petition, outsourcing, partnering, reengineering,
O
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OR Positioning—once the heart of strategy—is change management. Although the resulting
C
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N
SHI kets and changing technologies. According to dramatic, many companies have been frustrated
UBLI the new dogma, rivals can quickly copy any by their inability to translate those gains into
P
OL market position, and competitive advantage is, sustainable profitability. And bit by bit, almost
O
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C at best, temporary. imperceptibly, management tools have taken
S S
ES But those beliefs are dangerous half-truths, the place of strategy. As managers push to im-
N
SI and they are leading more and more companies prove on all fronts, they move farther away
U
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D down the path of mutually destructive compe- from viable competitive positions.
R
A
RV tition. True, some barriers to competition are Operational Effectiveness: Necessary but Not
A
© 1996 H fgalollbinagl. aTsr ureeg, ucolamtipoann eieass ehsa avned p mroaprekrelyts ibnevceostmede Saruef fibcioetnht . eOspseenrattiiaoln atol efsfuepcteivrieonre sps earnfod rsmtraatnecgey,
HT energy in becoming leaner and more nimble. which, after all, is the primary goal of any en-
G
YRI In many industries, however, what some call terprise. But they work in very different ways.
P
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harvard business review • november–december 1996 page 4
What Is Strategy?
A company can outperform rivals only if it can best practices at any given time. Think of it as
establish a difference that it can preserve. It must the maximum value that a company deliver-
deliver greater value to customers or create ing a particular product or service can create
comparable value at a lower cost, or do both. at a given cost, using the best available tech-
The arithmetic of superior profitability then fol- nologies, skills, management techniques, and
lows: delivering greater value allows a company purchased inputs. The productivity frontier
to charge higher average unit prices; greater can apply to individual activities, to groups
efficiency results in lower average unit costs. of linked activities such as order processing
Ultimately, all differences between companies and manufacturing, and to an entire com-
in cost or price derive from the hundreds of ac- pany’s activities. When a company improves
tivities required to create, produce, sell, and de- its operational effectiveness, it moves toward
liver their products or services, such as calling the frontier. Doing so may require capital in-
on customers, assembling final products, and vestment, different personnel, or simply new
training employees. Cost is generated by per- ways of managing.
forming activities, and cost advantage arises The productivity frontier is constantly shift-
from performing particular activities more effi- ing outward as new technologies and man-
ciently than competitors. Similarly, differentia- agement approaches are developed and as
tion arises from both the choice of activities and new inputs become available. Laptop com-
how they are performed. Activities, then are the puters, mobile communications, the Internet,
basic units of competitive advantage. Overall ad- and software such as Lotus Notes, for exam-
vantage or disadvantage results from all a com- ple, have redefined the productivity frontier
pany’s activities, not only a few.1 for sales-force operations and created rich
Operational effectiveness (OE) means per- possibilities for linking sales with such activi-
forming similar activities better than rivals per- ties as order processing and after-sales sup-
form them. Operational effectiveness includes port. Similarly, lean production, which involves a
but is not limited to efficiency. It refers to any family of activities, has allowed substantial
number of practices that allow a company to bet- improvements in manufacturing productivity
ter utilize its inputs by, for example, reducing de- and asset utilization.
fects in products or developing better products For at least the past decade, managers have
faster. In contrast, strategic positioning means been preoccupied with improving operational
performing different activities from rivals’ or per- effectiveness. Through programs such as TQM,
forming similar activities in different ways. time-based competition, and benchmarking,
Differences in operational effectiveness among they have changed how they perform activities
companies are pervasive. Some companies in order to eliminate inefficiencies, improve
are able to get more out of their inputs than customer satisfaction, and achieve best practice.
others because they eliminate wasted effort, Hoping to keep up with shifts in the produc-
employ more advanced technology, motivate tivity frontier, managers have embraced con-
employees better, or have greater insight into tinuous improvement, empowerment, change
managing particular activities or sets of activ- management, and the so-called learning orga-
ities. Such differences in operational effective- nization. The popularity of outsourcing and
Michael E. Porter is the C. Roland ness are an important source of differences in the virtual corporation reflect the growing
Christensen Professor of Business profitability among competitors because they recognition that it is difficult to perform all
Administration at the Harvard Business directly affect relative cost positions and activities as productively as specialists.
School in Boston, Massachusetts. levels of differentiation. As companies move to the frontier, they can
This article has benefited greatly Differences in operational effectiveness often improve on multiple dimensions of per-
from the assistance of many individuals were at the heart of the Japanese challenge to formance at the same time. For example, manu-
and companies. The author gives spe- Western companies in the 1980s. The Japa- facturers that adopted the Japanese practice of
cial thanks to Jan Rivkin, the coauthor nese were so far ahead of rivals in operational rapid changeovers in the 1980s were able to
of a related paper. Substantial research effectiveness that they could offer lower cost lower cost and improve differentiation simul-
contributions have been made by and superior quality at the same time. It is taneously. What were once believed to be
Nicolaj Siggelkow, Dawn Sylvester, and worth dwelling on this point, because so much real trade-offs—between defects and costs, for
Lucia Marshall. Tarun Khanna, Roger recent thinking about competition depends example—turned out to be illusions created by
Martin, and Anita McGahan have pro- on it. Imagine for a moment a productivity poor operational effectiveness. Managers have
vided especially extensive comments. frontier that constitutes the sum of all existing learned to reject such false trade-offs.
harvard business review • november–december 1996 page 5
What Is Strategy?
Constant improvement in operational ef- gains are being captured by customers and
fectiveness is necessary to achieve superior equipment suppliers, not retained in superior
profitability. However, it is not usually suffi- profitability. Even industry-leader Donnelley’s
cient. Few companies have competed success- profit margin, consistently higher than 7% in
fully on the basis of operational effectiveness the 1980s, fell to less than 4.6% in 1995. This
over an extended period, and staying ahead of pattern is playing itself out in industry after
rivals gets harder every day. The most obvious industry. Even the Japanese, pioneers of the
reason for that is the rapid diffusion of best new competition, suffer from persistently low
practices. Competitors can quickly imitate profits. (See the insert “Japanese Companies
management techniques, new technologies, Rarely Have Strategies.”)
input improvements, and superior ways of The second reason that improved opera-
meeting customers’ needs. The most generic tional effectiveness is insufficient—competitive
solutions—those that can be used in multiple convergence—is more subtle and insidious. The
settings—diffuse the fastest. Witness the pro- more benchmarking companies do, the more
liferation of OE techniques accelerated by they look alike. The more that rivals out-
support from consultants. source activities to efficient third parties,
OE competition shifts the productivity fron- often the same ones, the more generic those
tier outward, effectively raising the bar for activities become. As rivals imitate one an-
everyone. But although such competition pro- other’s improvements in quality, cycle times,
duces absolute improvement in operational ef- or supplier partnerships, strategies converge
fectiveness, it leads to relative improvement and competition becomes a series of races
for no one. Consider the $5 billion-plus U.S. down identical paths that no one can win.
commercial-printing industry. The major players— Competition based on operational effective-
R.R. Donnelley & Sons Company, Quebecor, ness alone is mutually destructive, leading
World Color Press, and Big Flower Press—are to wars of attrition that can be arrested only
competing head to head, serving all types of by limiting competition.
customers, offering the same array of printing The recent wave of industry consolidation
technologies (gravure and web offset), in- through mergers makes sense in the context of
vesting heavily in the same new equipment, OE competition. Driven by performance pres-
running their presses faster, and reducing crew sures but lacking strategic vision, company
sizes. But the resulting major productivity after company has had no better idea than to
buy up its rivals. The competitors left standing
are often those that outlasted others, not com-
panies with real advantage.
Operational Effectiveness After a decade of impressive gains in opera-
Versus Strategic Positioning tional effectiveness, many companies are facing
diminishing returns. Continuous improvement
has been etched on managers’ brains. But its
high tools unwittingly draw companies toward imi-
Productivity Frontier
tation and homogeneity. Gradually, managers
d (state of best practice)
e have let operational effectiveness supplant strat-
re
vile egy. The result is zero-sum competition, static or
d declining prices, and pressures on costs that
e
u compromise companies’ ability to invest in the
la
v re business for the long term.
y
u
b e II. Strategy Rests on Unique
cirp Activities
n Competitive strategy is about being different.
o
N
It means deliberately choosing a different set
of activities to deliver a unique mix of value.
low
Southwest Airlines Company, for example,
high low
offers short-haul, low-cost, point-to-point service
Relative cost position
between midsize cities and secondary airports
harvard business review • november–december 1996 page 6
What Is Strategy?
in large cities. Southwest avoids large airports service airlines employ a hub-and-spoke system
and does not fly great distances. Its customers centered on major airports. To attract passengers
include business travelers, families, and stu- who desire more comfort, they offer first-class
dents. Southwest’s frequent departures and or business-class service. To accommodate
low fares attract price-sensitive customers who passengers who must change planes, they co-
otherwise would travel by bus or car, and ordinate schedules and check and transfer
convenience-oriented travelers who would baggage. Because some passengers will be
choose a full-service airline on other routes. traveling for many hours, full-service airlines
Most managers describe strategic position- serve meals.
ing in terms of their customers: “Southwest Southwest, in contrast, tailors all its activities
Airlines serves price- and convenience-sensitive to deliver low-cost, convenient service on its par-
travelers,” for example. But the essence of strat- ticular type of route. Through fast turnarounds at
egy is in the activities—choosing to perform the gate of only 15 minutes, Southwest is able to
activities differently or to perform different ac- keep planes flying longer hours than rivals and
tivities than rivals. Otherwise, a strategy is provide frequent departures with fewer aircraft.
nothing more than a marketing slogan that Southwest does not offer meals, assigned seats,
will not withstand competition. interline baggage checking, or premium classes
A full-service airline is configured to get of service. Automated ticketing at the gate
passengers from almost any point A to any point encourages customers to bypass travel agents, al-
B. To reach a large number of destinations and lowing Southwest to avoid their commissions.
serve passengers with connecting flights, full- A standardized fleet of 737 aircraft boosts the
efficiency of maintenance.
Southwest has staked out a unique and valu-
able strategic position based on a tailored set
Japanese Companies Rarely Have Strategies of activities. On the routes served by South-
west, a full-service airline could never be as
The Japanese triggered a global revolu- peared unstoppable. But as the gap in convenient or as low cost.
tion in operational effectiveness in the operational effectiveness narrows, Jap- Ikea, the global furniture retailer based in
1970s and 1980s, pioneering practices anese companies are increasingly Sweden, also has a clear strategic positioning.
such as total quality management and caught in a trap of their own making. If Ikea targets young furniture buyers who want
continuous improvement. As a result, they are to escape the mutually destruc- style at low cost. What turns this marketing
Japanese manufacturers enjoyed sub- tive battles now ravaging their perfor- concept into a strategic positioning is the tai-
stantial cost and quality advantages for mance, Japanese companies will have lored set of activities that make it work. Like
many years. to learn strategy. Southwest, Ikea has chosen to perform activi-
But Japanese companies rarely de- To do so, they may have to overcome ties differently from its rivals.
veloped distinct strategic positions of strong cultural barriers. Japan is noto- Consider the typical furniture store. Show-
the kind discussed in this article. riously consensus oriented, and com- rooms display samples of the merchandise.
Those that did—Sony, Canon, and Sega, panies have a strong tendency to medi- One area might contain 25 sofas; another will
for example—were the exception rather ate differences among individuals display five dining tables. But those items rep-
than the rule. Most Japanese compa- rather than accentuate them. Strategy, resent only a fraction of the choices available
nies imitate and emulate one another. on the other hand, requires hard to customers. Dozens of books displaying fabric
All rivals offer most if not all product choices. The Japanese also have a swatches or wood samples or alternate styles
varieties, features, and services; they deeply ingrained service tradition that offer customers thousands of product varieties
employ all channels and match one predisposes them to go to great to choose from. Salespeople often escort cus-
anothers’ plant configurations. lengths to satisfy any need a customer tomers through the store, answering questions
The dangers of Japanese-style compe- expresses. Companies that compete in and helping them navigate this maze of choices.
tition are now becoming easier to rec- that way end up blurring their distinct Once a customer makes a selection, the order
ognize. In the 1980s, with rivals operat- positioning, becoming all things to is relayed to a third-party manufacturer. With
ing far from the productivity frontier, it all customers. luck, the furniture will be delivered to the cus-
seemed possible to win on both cost tomer’s home within six to eight weeks. This is
and quality indefinitely. Japanese com- This discussion of Japan is drawn from a value chain that maximizes customization
panies were all able to grow in an ex- the author’s research with Hirotaka and service but does so at high cost.
panding domestic economy and by Takeuchi, with help from Mariko In contrast, Ikea serves customers who are
penetrating global markets. They ap- Sakakibara. happy to trade off service for cost. Instead of
harvard business review • november–december 1996 page 7
What Is Strategy?
having a sales associate trail customers around or service varieties rather than customer
the store, Ikea uses a self-service model based segments. Variety-based positioning makes
on clear, in-store displays. Rather than rely economic sense when a company can best
solely on third-party manufacturers, Ikea designs produce particular products or services using
its own low-cost, modular, ready-to-assemble distinctive sets of activities.
furniture to fit its positioning. In huge stores, Jiffy Lube International, for instance, spe-
Ikea displays every product it sells in room-like cializes in automotive lubricants and does not
settings, so customers don’t need a decorator offer other car repair or maintenance services.
to help them imagine how to put the pieces to- Its value chain produces faster service at a
gether. Adjacent to the furnished showrooms lower cost than broader line repair shops, a
is a warehouse section with the products in combination so attractive that many customers
boxes on pallets. Customers are expected to do subdivide their purchases, buying oil changes
their own pickup and delivery, and Ikea will from the focused competitor, Jiffy Lube, and
even sell you a roof rack for your car that you going to rivals for other services.
can return for a refund on your next visit. The Vanguard Group, a leader in the mutual
Although much of its low-cost position comes fund industry, is another example of variety-
from having customers “do it themselves,” Ikea based positioning. Vanguard provides an
offers a number of extra services that its com- array of common stock, bond, and money
petitors do not. In-store child care is one. Ex- market funds that offer predictable perfor-
tended hours are another. Those services are mance and rock-bottom expenses. The com-
uniquely aligned with the needs of its custom- pany’s investment approach deliberately
ers, who are young, not wealthy, likely to sacrifices the possibility of extraordinary per-
have children (but no nanny), and, because formance in any one year for good relative
they work for a living, have a need to shop performance in every year. Vanguard is known,
at odd hours. for example, for its index funds. It avoids mak-
The Origins of Strategic Positions. Strategic ing bets on interest rates and steers clear of
positions emerge from three distinct sources, narrow stock groups. Fund managers keep
which are not mutually exclusive and often trading levels low, which holds expenses
overlap. First, positioning can be based on pro- down; in addition, the company discourages
ducing a subset of an industry’s products or customers from rapid buying and selling be-
services. I call this variety-based positioning cause doing so drives up costs and can force a
because it is based on the choice of product fund manager to trade in order to deploy new
Finding New Positions: The Entrepreneurial Edge
Strategic competition can be thought of as positions that have been available but simply Circuit City’s expertise in inventory manage-
the process of perceiving new positions that overlooked by established competitors. Ikea, ment, credit, and other activities in consumer
woo customers from established positions or for example, recognized a customer group electronics retailing.
draw new customers into the market. For ex- that had been ignored or served poorly. Cir- Most commonly, however, new positions
ample, superstores offering depth of mer- cuit City Stores’ entry into used cars, CarMax, open up because of change. New customer
chandise in a single product category take is based on a new way of performing activities— groups or purchase occasions arise; new
market share from broad-line department extensive refurbishing of cars, product guaran- needs emerge as societies evolve; new distri-
stores offering a more limited selection in tees, no-haggle pricing, sophisticated use of in- bution channels appear; new technologies
many categories. Mail-order catalogs pick off house customer financing—that has long are developed; new machinery or informa-
customers who crave convenience. In princi- been open to incumbents. tion systems become available. When such
ple, incumbents and entrepreneurs face the New entrants can prosper by occupying a changes happen, new entrants, unencum-
same challenges in finding new strategic po- position that a competitor once held but has bered by a long history in the industry, can
sitions. In practice, new entrants often have ceded through years of imitation and strad- often more easily perceive the potential
the edge. dling. And entrants coming from other indus- for a new way of competing. Unlike incum-
Strategic positionings are often not obvi- tries can create new positions because of dis- bents, newcomers can be more flexible be-
ous, and finding them requires creativity and tinctive activities drawn from their other cause they face no trade-offs with their
insight. New entrants often discover unique businesses. CarMax borrows heavily from existing activities.
harvard business review • november–december 1996 page 8
What Is Strategy?
capital and raise cash for redemptions. ticated account officer for every 14 families,
Vanguard also takes a consistent low-cost ap- Bessemer has configured its activities for per-
proach to managing distribution, customer sonalized service. Meetings, for example, are
service, and marketing. Many investors in- more likely to be held at a client’s ranch or
clude one or more Vanguard funds in their yacht than in the office. Bessemer offers a wide
portfolio, while buying aggressively managed array of customized services, including invest-
or specialized funds from competitors. ment management and estate administration,
The people who use Vanguard or Jiffy oversight of oil and gas investments, and ac-
Lube are responding to a superior value chain counting for racehorses and aircraft. Loans, a
for a particular type of service. A variety-based staple of most private banks, are rarely needed
positioning can serve a wide array of custom- by Bessemer’s clients and make up a tiny frac-
ers, but for most it will meet only a subset of tion of its client balances and income. Despite
their needs. the most generous compensation of account
A second basis for positioning is that of serv- officers and the highest personnel cost as a per-
ing most or all the needs of a particular group centage of operating expenses, Bessemer’s dif-
of customers. I call this needs-based positioning, ferentiation with its target families produces a
which comes closer to traditional thinking return on equity estimated to be the highest of
about targeting a segment of customers. It arises any private banking competitor.
when there are groups of customers with dif- Citibank’s private bank, on the other hand,
fering needs, and when a tailored set of activi- serves clients with minimum assets of about
ties can serve those needs best. Some groups of $250,000 who, in contrast to Bessemer’s clients,
customers are more price sensitive than others, want convenient access to loans—from jumbo
demand different product features, and need mortgages to deal financing. Citibank’s account
A company can varying amounts of information, support, and managers are primarily lenders. When clients
services. Ikea’s customers are a good example need other services, their account manager re-
outperform rivals only if
of such a group. Ikea seeks to meet all the fers them to other Citibank specialists, each of
it can establish a home furnishing needs of its target customers, whom handles prepackaged products. Citibank’s
not just a subset of them. system is less customized than Bessemer’s and
difference that it can A variant of needs-based positioning arises allows it to have a lower manager-to-client
when the same customer has different needs ratio of 1:125. Biannual office meetings are of-
preserve.
on different occasions or for different types of fered only for the largest clients. Both Bessemer
transactions. The same person, for example, and Citibank have tailored their activities to
may have different needs when traveling on meet the needs of a different group of private
business than when traveling for pleasure with banking customers. The same value chain can-
the family. Buyers of cans—beverage compa- not profitably meet the needs of both groups.
nies, for example—will likely have different The third basis for positioning is that of seg-
needs from their primary supplier than from menting customers who are accessible in dif-
their secondary source. ferent ways. Although their needs are similar
It is intuitive for most managers to conceive to those of other customers, the best configu-
of their business in terms of the customers’ ration of activities to reach them is different. I
needs they are meeting. But a critical element call this access-based positioning. Access can be
of needs-based positioning is not at all intuitive a function of customer geography or cus-
and is often overlooked. Differences in needs tomer scale—or of anything that requires a
will not translate into meaningful positions different set of activities to reach customers
unless the best set of activities to satisfy them in the best way.
also differs. If that were not the case, every Segmenting by access is less common and
competitor could meet those same needs, and less well understood than the other two bases.
there would be nothing unique or valuable Carmike Cinemas, for example, operates movie
about the positioning. theaters exclusively in cities and towns with
In private banking, for example, Bessemer populations under 200,000. How does Car-
Trust Company targets families with a mini- mike make money in markets that are not only
mum of $5 million in investable assets who small but also won’t support big-city ticket
want capital preservation combined with prices? It does so through a set of activities
wealth accumulation. By assigning one sophis- that result in a lean cost structure. Carmike’s
harvard business review • november–december 1996 page 9
What Is Strategy?
small-town customers can be served through competitor, such as Ikea, targets the special
standardized, low-cost theater complexes re- needs of a subset of customers and designs its
quiring fewer screens and less sophisticated activities accordingly. Focused competitors
projection technology than big-city theaters. thrive on groups of customers who are over-
The company’s proprietary information system served (and hence overpriced) by more broadly
and management process eliminate the need targeted competitors, or underserved (and
for local administrative staff beyond a single hence underpriced). A broadly targeted com-
theater manager. Carmike also reaps advan- petitor—for example, Vanguard or Delta Air
tages from centralized purchasing, lower rent Lines—serves a wide array of customers, per-
and payroll costs (because of its locations), and forming a set of activities designed to meet
rock-bottom corporate overhead of 2% (the in- their common needs. It ignores or meets only
dustry average is 5%). Operating in small com- partially the more idiosyncratic needs of par-
munities also allows Carmike to practice a ticular customer customer groups.
highly personal form of marketing in which Whatever the basis—variety, needs, access,
the theater manager knows patrons and pro- or some combination of the three—positioning
motes attendance through personal contacts. requires a tailored set of activities because it is
By being the dominant if not the only theater always a function of differences on the supply
in its markets—the main competition is often side; that is, of differences in activities. How-
the high school football team—Carmike is also ever, positioning is not always a function of
able to get its pick of films and negotiate better differences on the demand, or customer,
terms with distributors. side. Variety and access positionings, in partic-
Rural versus urban-based customers are ular, do not rely on any customer differences.
one example of access driving differences in In practice, however, variety or access differ-
activities. Serving small rather than large cus- ences often accompany needs differences. The
tomers or densely rather than sparsely situ- tastes—that is, the needs—of Carmike’s small-
ated customers are other examples in which town customers, for instance, run more toward
the best way to configure marketing, order comedies, Westerns, action films, and family
processing, logistics, and after-sale service ac- entertainment. Carmike does not run any films
tivities to meet the similar needs of distinct rated NC-17.
groups will often differ. Having defined positioning, we can now
Positioning is not only about carving out a begin to answer the question, “What is strategy?”
niche. A position emerging from any of the Strategy is the creation of a unique and valu-
sources can be broad or narrow. A focused able position, involving a different set of activi-
ties. If there were only one ideal position,
there would be no need for strategy. Compa-
nies would face a simple imperative—win the
The Connection with Generic Strategies race to discover and preempt it. The essence of
strategic positioning is to choose activities that
In Competitive Strategy (The Free Press, Ikea and Southwest are both cost-based are different from rivals’. If the same set of ac-
1985), I introduced the concept of ge- focusers, for example, but Ikea’s focus is tivities were best to produce all varieties, meet
neric strategies—cost leadership, differ- based on the needs of a customer group, all needs, and access all customers, companies
entiation, and focus—to represent the and Southwest’s is based on offering a could easily shift among them and operational
alternative strategic positions in an in- particular service variety. effectiveness would determine performance.
dustry. The generic strategies remain The generic strategies framework in-
useful to characterize strategic positions troduced the need to choose in order III. A Sustainable Strategic Position
at the simplest and broadest level. Van- to avoid becoming caught between Requires Trade-offs
guard, for instance, is an example of a what I then described as the inherent Choosing a unique position, however, is not
cost leadership strategy, whereas Ikea, contradictions of different strategies. enough to guarantee a sustainable advantage.
with its narrow customer group, is an ex- Trade-offs between the activities of in- A valuable position will attract imitation by in-
ample of cost-based focus. Neutrogena compatible positions explain those cumbents, who are likely to copy it in one of
is a focused differentiator. The bases for contradictions. Witness Continental two ways.
positioning—varieties, needs, and access— Lite, which tried and failed to compete First, a competitor can reposition itself to
carry the understanding of those generic in two ways at once. match the superior performer. J.C. Penney,
strategies to a greater level of specificity. for instance, has been repositioning itself
harvard business review • november–december 1996 page 10
