What is Strategy.docx
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What is Strategy.docx
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WhatisStrategy
WhatisStrategy?
Excerptsfrom:
Porter,MichaelE.,HarvardBusinessReview,Nov/Dec96,Vol.74Issue6,p61
WHATISSTRATEGY?
OperationalEffectivenessIsNotStrategy
Foralmosttwodecades,managershavebeenlearningtoplaybyanewsetofrules.Companiesmustbeflexibletorespondrapidlytocompetitiveandmarketchanges.Theymustbenchmarkcontinuouslytoachievebestpractice.Theymustoutsourceaggressivelytogainefficiencies.Andtheymustnurtureafewcorecompetenciesintheracetostayaheadofrivals….
…..Thequestforproductivity,quality,andspeedhasspawnedaremarkablenumberofmanagementtoolsandtechniques:
totalqualitymanagement,`benchmarking,time-basedcompetition,outsourcing,partnering,reengineering,changemanagement.Althoughtheresultingoperationalimprovementshaveoftenbeendramatic,manycompanieshavebeenfrustratedbytheirinabilitytotranslatethosegainsintosustainableprofitability.Andbitbybit,almostimperceptibly,managementtoolshavetakentheplaceofstrategy.Asmanagerspushtoimproveonallfronts,theymovefartherawayfromviablecompetitivepositions.
OperationalEffectiveness:
NecessarybutNotSufficient
Operationaleffectivenessandstrategyarebothessentialtosuperiorperformance,which,afterall,istheprimarygoalofanyenterprise.Buttheyworkinverydifferentways.
Acompanycanoutperformrivalsonlyifitcanestablishadifferencethatitcanpreserve.Itmustdelivergreatervaluetocustomersorcreatecomparablevalueatalowercost,ordoboth.Thearithmeticofsuperiorprofitabilitythenfollows:
deliveringgreatervalueallowsacompanytochargehigheraverageunitprices;greaterefficiencyresultsinloweraverageunitcosts.
Ultimately,alldifferencesbetweencompaniesincostorpricederivefromthehundredsofactivitiesrequiredtocreate,produce,sell,anddelivertheirproductsorservices,suchascallingoncustomers,assemblingfinalproducts,andtrainingemployees.Costisgeneratedbyperformingactivities,andcostadvantagearisesfromperformingparticularactivitiesmoreefficientlythancompetitors.Similarly,differentiationarisesfromboththechoiceofactivitiesandhowtheyareperformed.Activities,then,arethebasicunitsofcompetitiveadvantage.Overalladvantageordisadvantageresultsfromallacompany'sactivities,notonlyafew.'
Operationaleffectivenessmeansperformingsimilaractivitiesbetterthanrivalsperformthem.Operationaleffectivenessincludesbutisnotlimitedtoefficiency.Itreferstoanynumberofpracticesthatallowacompanytobetterutilizeitsinputsby,forexample,reducingdefectsinproductsordevelopingbetterproductsfaster.Incontrast,strategicpositioningmeansperformingdifferentactivitiesfromrivals'orperformingsimilaractivitiesindifferentways.
Differencesinoperationaleffectivenessamongcompaniesarepervasive.Somecompaniesareabletogetmoreoutoftheirinputsthanothersbecausetheyeliminatewastedeffort,employmoreadvancedtechnology,motivateemployeesbetter,orhavegreaterinsightintomanagingparticularactivitiesorsetsofactivities.Suchdifferencesinoperationaleffectivenessareanimportantsourceofdifferencesinprofitabilityamongcompetitorsbecausetheydirectlyaffectrelativecostpositionsandlevelsofdifferentiation.
DifferencesinoperationaleffectivenesswereattheheartoftheJapanesechallengetoWesterncompaniesinthe1980s.TheJapaneseweresofaraheadofrivalsinoperationaleffectivenessthattheycouldofferlowercostandsuperiorqualityatthesametime.Itisworthdwellingonthispoint,becausesomuchrecentthinkingaboutcompetitiondependsonit.Imagineforamomentaproductivityfrontierthatconstitutesthesumofallexistingbestpracticesatanygiventime.Thinkofitasthemaximumvaluethatacompanydeliveringaparticularproductorservicecancreateatagivencost,usingthebestavailabletechnologies,skills,managementtechniques,andpurchasedinputs.Theproductivityfrontiercanapplytoindividualactivities,togroupsoflinkedactivitiessuchasorderprocessingandmanufacturing,andtoanentirecompany'sactivities.Whenacompanyimprovesitsoperationaleffectiveness,itmovestowardthefrontier.Doingsomayrequirecapitalinvestment,differentpersonnel,orsimplynewwaysofmanaging.
Theproductivityfrontierisconstantlyshiftingoutwardasnewtechnologiesandmanagementapproachesaredevelopedandasnewinputsbecomeavailable.Laptopcomputers,mobilecommunications,theInternet,andsoftware…haveredefinedtheproductivityfrontierforsales-forceoperationsandcreatedrichpossibilitiesforlinkingsaleswithsuchactivitiesasorderprocessingandafter-salessupport.Similarly,leanproduction,whichinvolvesafamilyofactivities,hasallowedsubstantialimprovementsinmanufacturingproductivityandassetutilization.
Foratleastthepastdecade,managershavebeenpreoccupiedwithimprovingoperationaleffectiveness.ThroughprogramssuchasTQM,time-basedcompetition,andbenchmarking,theyhavechangedhowtheyperformactivitiesinordertoeliminateinefficiencies,improvecustomersatisfaction,andachievebestpractice.Hopingtokeepupwithshiftsintheproductivity'frontier,managershaveembracedcontinuousimprovement,empowerment,changemanagement,andtheso-calledlearningorganization.Thepopularityofoutsourcingandthevirtualcorporationreflectthegrowingrecognitionthatitisdifficulttoperformallactivitiesasproductivelyasspecialists….
….Constantimprovementinoperationaleffectivenessisnecessarytoachievesuperiorprofitability.However,itisnotusuallysufficient.Fewcompanieshavecompetedsuccessfullyonthebasisofoperationaleffectivenessoveranextendedperiod,andstayingaheadofrivalsgetshardereveryday.Themostobviousreasonforthatistherapiddiffusionofbestpractices.Competitorscanquicklyimitatemanagementtechniques,newtechnologies,inputimprovements,andsuperiorwaysofmeetingcustomers'needs.Themostgenericsolutions-thosethatcanbeusedinmultiplesettings-diffusethefastest.WitnesstheproliferationofOEtechniquesacceleratedbysupportfromconsultants.….Thesecondreasonthatimprovedoperationaleffectivenessisinsufficient-competitiveconvergence-ismoresubtleandinsidious.Themorebenchmarkingcompaniesdo,themoretheylookalike.Themorethatrivalsoutsourceactivitiestoefficientthirdparties,oftenthesameones,themoregenericthoseactivitiesbecome.Asrivalsimitateoneanother'simprovementsinquality,cycletimes,orsupplierpartnerships,strategiesconvergeandcompetitionbecomesaseriesofracesdownidenticalpathsthatnoonecanwin.Competitionbasedonoperationaleffectivenessaloneismutuallydestructive,leadingtowarsofattritionthatcanbearrestedonlybylimitingcompetition.
TherecentwaveofindustryconsolidationthroughmergersmakessenseinthecontextofOEcompetition.Drivenbyperformancepressuresbutlackingstrategicvision,companyaftercompanyhashadnobetterideathantobuyupitsrivals.Thecompetitorsleftstandingareoftenthosethatoutlastedothers,notcompanieswithrealadvantage.
Afteradecadeofimpressivegainsinoperationaleffectiveness,manycompaniesarefacingdiminishingreturns.Continuousimprovementhasbeenetchedonmanagers'brains.Butitstoolsunwittinglydrawcompaniestowardimitationandhomogeneity.Gradually,managershaveletoperationaleffectivenesssupplantstrategy.Theresultiszero-sumcompetition,staticordecliningprices,andpressuresoncoststhatcompromisecompanies'abilitytoinvestinthebusinessforthelongterm.
StrategyRestsonUniqueActivities
Competitivestrategyisaboutbeingdifferent.Itmeansdeliberatelychoosingadifferentsetofactivitiestodeliverauniquemixofvalue.
SouthwestAirlinesCompany,forexample,offersshort-haul,low-cost,point-to-pointservicebetweenmidsizecitiesandsecondaryairportsinlargecities.Southwestavoidslargeairportsanddoesnotflygreatdistances.Itscustomersincludebusinesstravelers,families,andstudents.Southwest'sfrequentdeparturesandlowfaresattractpricesensitivecustomerswhootherwisewouldtravelbybusorcar,andconvenience-orientedtravelerswhowouldchooseafull-serviceairlineonotherroutes.
Mostmanagersdescribestrategicpositioningintermsoftheircustomers:
"SouthwestAirlinesservesprice-andconvenience-sensitivetravelers,"forexample.Buttheessenceofstrategyisintheactivities-choosingtoperformactivitiesdifferentlyortoperformdifferentactivitiesthanrivals.Otherwise,astrategyisnothingmorethanamarketingsloganthatwillnotwithstandcompetition.
Afull-serviceairlineisconfiguredtogetpassengersfromalmostanypointAtoanypointB.Toreachalargenumberofdestinationsandservepassengerswithconnectingflights,full-serviceairlinesemployahub-and-spokesystemcenteredonmajorairports.Toattractpassengerswhodesiremorecomfort,theyofferfirst-classorbusinessclassservice.Toaccommodatepassengerswhomustchangeplanes,theycoordinateschedulesandcheckandtransferbaggage.Becausesomepassengerswillbetravelingformanyhours,full-serviceairlinesservemeals.
Southwest,incontrast,tailorsallitsactivitiestodeliverlow-cost,convenientserviceonitsparticulartypeofroute.Throughfastturnaroundsatthegateofonly15minutes,Southwestisabletokeepplanesflyinglongerhoursthanrivalsandprovidefrequentdepartureswithfeweraircraft.Southwestdoesnotoffermeals,assignedseats,interlinebaggagechecking,orpremiumcla
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