You want to grow your company. You want to be a better company, maybe the best. You want to stand out from your competition. So what do you do? You develop what you think is a strategy. You find ways to cut costs, be more efficient, and maybe sell more products or services to your customers. Better, quicker, faster. This is the key to setting yourself apart…OR SO YOU THOUGHT!
When companies consider how to grow their revenue, profit, and market share, they often think in terms of making their operation more efficient. This, they think, is their strategy. While such efficiencies may help improve profits and growth in the short run, it will not produce long term benefits for your company. The reason is that every company is pursuing these same things. And if everyone is getting better, faster, cheaper, then comparatively, everyone is still the same. And what’s more, as you get more and more efficient, the harder it becomes to make additional efficiency gains. So let me repeat, “operational efficiency IS NOT strategy.”
So how is strategy different from operational effectiveness? Strategy is carving out a niche for yourself in the marketplace – a way to differentiate your company from others. Operational effectiveness is making yourself better or faster, regardless of niche. Strategy is a way to provide greater value to your customers at a similar price, or similar value at a lower price. Operation effectiveness, on the other hand, is just making your company run more smoothly. This may have short-term benefits, but in the long run, you will be no different than your competitors, as these things are easily replicable, thus giving no advantage to anyone. A company can only become so productive before quality drops.
“Strategy means performing different activities from rivals, or performing similar activities in different ways.” (Michael Porter, “What is Strategy”)
Now this does not mean that operational effectiveness is not important. Competitors will be striving for operational effectiveness and if we choose to neglect this aspect, we will either lose customers or see profit margins dwindle. But operational efficiency alone will not truly differentiate you for your competitors. And what’s worse, it will not make you more profitable in the long run. As Michael Porter says, “Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it is not usually sufficient. Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day.” If your company has no real strategy and competes only on the basis of operational effectiveness, then you have become a commodity, no different than buying gas from Shell or Chevron.
Sure, you need to be operationally efficient. But more importantly, you need a strategy!