"What is Strategy?" (From Michael Porter, 1996)

Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it is not usually sufficient. For example, in the U.S. Commercial-Printing Industry, firms are competing head to head, serving all types of customers, offering the same array of printing technologies, investing heavily in the same equipment, running their presses faster, and reducing crew sizes. But the resulting major productivity gains are being captured by customers and equipment suppliers, not retained in superior profitability.

Strategy Rests on Unique Activities. Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value. As we shall see below, Southwest Airlines illustrates "strategic coherence." The essence of strategy is in the activities - choosing to perform activities differently or to perform different activities than rivals. In particular, strategy is about combining activities.

Strategic Coherence

One way of describing the field of strategic management is to say that it is the study of how managers organize and position the firm to gain sustainable competitive advantage. By sustainable competitive advantage, we mean that the firm achieves superior returns on investments which do not erode in a short period of time. There are many ways to attain a competitive advantage (and even more ways to lose one). For example, a firm might exploit a first-mover advantage to enter into a particular market segment which is not large enough to accommodate more than one firm. Another strategy may rely on utilizing some unique set of resources or capabilities that other competitors do not have and cannot easily replicate. Most successful strategies (as one can see in the case of Wal-mart) rely on a combination of factors to create a sustainable competitive advantage.

A hallmark of most successful strategies is that they are "strategically coherent." Strategic coherence refers to the extent to which the various functional strategies a firm employs complement and reinforce one another. In a coherent strategy, functional strategies "dovetail" together to achieve the overall strategic objectives of the firm. Such strategies are more successful because they are more difficult to imitate. Incumbents find they cannot rationalize changing to a new strategy because of past investments they have made; new entrants find it difficult to manage the immediate implementation of complex strategies that have often evolved over a great deal of time. Thus, coherent strategies often result in a sustainable competitive advantage. That is, strategic coherence may not be a sufficient condition for attaining a competitive advantage but it is often a necessary one.

Southwest Airlines. Strategic coherence is difficult to define precisely, but strategic coherence is easy to recognize. Take, for example, Southwest Airlines. Southwest Airlines' strategy is to deliver low-priced air transportation with attention to customer service. They do not serve meals. They fly point-to-point rather than using a hub-and-spoke system like other airlines. Southwest only flies one kind of plane, the Boeing 737. To implement this strategy successfully, Southwest has to keep its costs under control -- and they have. Southwest has the lowest cost per passenger mile of any major airline in the United States. As a result, they have also been one of the only profitable airlines in the domestic market.

How is Southwest's strategy coherent, and how is that coherence related to their success? One of the most important costs confronted in the airline business is "fixed costs" associated with acquiring a fleet of aircraft. Traditionally, major airlines have adopted the hub-and-spoke route structure as a means of minimizing the number of aircraft they have to purchase. However, Southwest has taken a different approach to solving this problem -- maximizing each plane's time in the air producing revenue for the company. By providing short-haul, low-cost, point-to-point service between mid-size cities and secondary airports in large cities rather than hub-and-spoke, Southwest avoids the long delays associated with waiting for aircraft to fly into a hub and switching passengers. Avoiding such delays encourages Southwest to focus on increasing operational efficiency and reducing time at the gate. As a result, a typical Southwest plane only spends 15 to 20 minutes at the gate before taking off again. For example, because Southwest doesn't serve meals, they do not experience the loading time associated with meal service. Because they fly only one kind of aircraft (the Boeing 737), Southwest doesn't have to manage the process of matching aircraft to specific flights; having such flexibility is valuable when unexpected maintenance problems arise. In addition, their well-paid crews and maintenance personnel (with flexible union rules) can "specialize" in operating and maintaining one kind of aircraft, increasing efficiency and reducing training costs. Also, because Southwest doesn't serve meals, the number of flight attendants required on a plane is reduced. Southwest does not offer assigned seats, interline baggage checking, or premium classes of service. Automated ticketing at the gate encourages customers to bypass travel agents, allowing Southwest to avoid travel agents' commissions. As one can see, Southwest's policies result in a network of "spill-over effects" that combine together to create their low-cost structure. It isn't any one particular functional strategy that results in the advantage, but the synergies between them. Southwest's strategy involves a whole system of activities. Southwest's activities complement one another in ways that create real economic value. Of course, one must remember that the success of such a strategy is dependent on others not being able to profitably imitate such a strategy and that the market segment the strategy addresses is large enough to support such a strategy.

A Sustainable Strategic Position Requires Trade-offs. Continental Airlines saw how well Southwest was doing and tried to imitate Southwest in some markets. While maintaining its position as a full-service airline, Continental also set out to match Southwest on a number of point-to-point routes. The airline dubbed the new service "Continental Lite." It eliminated meals and first-class service, increased departure frequency, lowered fares, and shortened turnaround time at the gate. Because Continental remained a full-service airline on other routes, it continued to use travel agents and its mixed fleet of planes and to provide baggage checking and seat assignments. An airline can choose to serve meals - adding cost and slowing turnaround time at the gate - or it can choose not to, but it cannot do both without bearing major inefficiencies.

Trade-offs arise for three reasons:

1. Inconsistencies in image or reputation. A company known for delivering one kind of value may lack credibility and confuse customers - or even undermine its reputation - if it delivers another kind of value or attempts to deliver two inconsistent things at the same time.
2. Trade-offs arise from activities themselves. Different positions (with tailored activities) require different product configurations, different equipment, different employee behavior, different skills, and different managerial systems.
3. Tradeoffs arise from limits on internal coordination and control.

Trade-offs ultimately grounded Continental Lite. The airline lost hundreds of millions of dollars, and the CEO lost his job. Its planes were delayed, leaving congested hub cities or slowed at the gate by baggage transfers. Late flights and cancellations generated a thousand complaints a day. Continental Lite could not afford to compete on price and still pay standard travel-agent commissions, but neither could it do without agents for its full service business. Continental tried to compete in two ways at once trying to be low cost on some routes and full service on others and it paid an enormous penalty.

Fit and Sustainability. A dynamic strategic fit among many activities is fundamental not only for creating competitive advantage, but also to the sustainability of that advantage. It is harder for a rival to match an array of interlocked activities than it is merely to imitate a particular sales-force approach, match a process technology, or replicate a set of product features. Positions built on systems of activities are far more sustainable than those built on individual activities. Achieving fit is difficult because it requires the integration of decisions and actions across many independent subunits.

A competitor seeking to match an activity system gains little by imitating only some activities and not matching the whole. Performance does not improve; it can decline, as Continental Lite's disastrous attempt to imitate Southwest Airline illustrates. When activities complement and reinforce one another, rivals will get little benefit from imitation unless they successfully match the whole system.

Frequent shifts in positioning are costly. Not only must a company reconfigure individual activities, but it must also realign entire systems. A company's choice of a new position must be driven by the ability to find new trade-offs and leverage a new system of complementary activities into a sustainable competitive advantage.

General management is more than the stewardship of individual functions. Its core is strategy: defining and communicating the company's unique position, making trade-offs, and forging a dynamic fit among activities to achieve "strategic coherence."

Saturn Corporation. Another example of strategic coherence and its importance to competitive advantage comes from the automobile industry. Everyone has heard about Saturn's "no haggle" pricing policy. That is, Saturn sells for the price at which it is listed. Saturn instituted this policy because they found in customer focus groups that customers are often aggravated and confused by the process of negotiating the price of the car. Thus, the "no haggle" policy creates value for the customer by making the purchase process simpler and more pleasurable. But beneath the surface, the "no haggle" policy is actually one element of a more complex strategy used by Saturn to improve the overall ownership experience which is extremely dependent on the type of service provided by the Saturn dealers.

If we think about the nature of the dealer's business, we can see that it is highly dependent on their sales volume. The dealer has two "levers" for manipulating sales volume, price and service. By fixing the price at which Saturn can sell, the manufacturer has basically tied the hands of the dealers and forced them to compete on service. In addition, Saturn closely monitors the performance of its dealers through customer surveys and inspections. But, there is more to this strategy than just restricting price competition and close monitoring.

Unlike other manufacturers, Saturn gives its dealers exclusive rights to specific geographic regions. For example, "Saturn of Champaign County" has the exclusive right to sell Saturn automobiles in Champaign County. The dealers can build as many dealerships within their region as they desire, and the dealers have control over the location of those dealerships. One can see that what Saturn has done is establish a series of local monopolies for its dealers. It is this local monopoly power which gives the dealers the incentive to accept the other restrictions Saturn has placed on their behavior. Along with this local monopoly power, Saturn also gives its dealers a higher margin on its cars compared with other manufacturers. Without such positive incentives, Saturn would find it far too difficult to maintain quality dealer service using only close monitoring. Thus, Saturn has implemented a set of "carrots and sticks" which complement and reinforce one another to create competitive advantage. As a result, Saturn has attained one of the highest customer satisfaction indices of any automaker.

Of course, for Southwest and Saturn to sustain their competitive advantage, it is necessary that such strategies be difficult to imitate, and we can introduce some anecdotal evidence to demonstrate why these strategies might be sustainable. For example, Continental Airlines has attempted to replicate Southwest's strategy by introducing a new brand, "Continental Lite." For their "Lite" service, Continental restructured some of their routes around the same "point-to-point" strategy used by Southwest, discontinued meal service on those flights, and also imitated many of Southwest's policies. There was just one problem. Because Continental had previously been focused on providing transcontinental and international service, similar to other major air carriers, they had a fleet composed of many different aircraft. Many of these aircraft were only efficient carrying large numbers of passengers over longer routes. When they attempted to imitate Southwest, Continental simply could not match the operating efficiencies necessary to be profitable, and they were forced to abandon this strategy.

Evidence of the sustainability of Saturn's strategy has a unique, ironic twist because the imitators are other divisions of General Motors (who own Saturn). Seeing the success of Saturn's strategy, other divisions of GM, such as Oldsmobile and Chevrolet, have attempted to implement Saturn's "no haggle" pricing policy. In fact, Oldsmobile's adoption of this practice is a deliberate outcome of their overall strategy to be the car to which Saturn owners "trade up." The problem is that the evolution of Olds' and Chevy's dealerships has resulted in "non-exclusive" territories for its dealers. Because GM was dominating in the car business for so long, they historically were more concerned about total company volume and, thus, simply concentrated on the total number of dealerships. The fragmented structure of these local markets has led to a situation where the particular histories of other incumbents inhibit their ability to respond to a coherent strategy developed by a new entrant. In this instance the source of sustainability has the unusual implication that the strategy not only cannot be imitated by other incumbent firms, but also cannot even be easily replicated by other divisions of the company.