Operational Efficiency is NOT Strategy
When it comes to business strategy, many organizations and leaders mistake operational efficiency for business strategy. What I mean is that many businesses focus on things like improving quality, lowering prices, or negotiating better terms with suppliers, thinking this is strategy. The problem is that every company will eventually go down this same path. Every company is going to push for better quality, cut costs, and boost margins. The problem is that these operational efficiency tasks, while important, are something every other business can do. There is nothing about focusing on these tasks that makes your organization unique, no matter how important they are to operations.
This results in what I call the zero-sum economy, where, in order for one company to win, another must lose. This becomes a big problem for many leaders, as we are witnessing in today’s economy. Many leaders are faced with declining margins, fewer differences to compete on, and less cash to invest in the business for the long term.
While I’m not downplaying the need for operational efficiency, what is clear is that operational efficiency is limited in how far it can help an organization stay competitive. So, a competitive strategy is about choosing a different set of activities than the competition that results in creating something different that provides a different value. A great example is Southwest Airlines. Their differentiating activity was offering short-haul flights between midsize cities and secondary airports, avoiding large airports. This was a perfect combination of operational efficiency and differentiating activity. By focusing on short-haul flights (different activity), they were able to add tremendous value for price-sensitive customers who would otherwise travel by bus or car, and add tremendous value for convenience-sensitive customers who would otherwise choose the larger airlines (differentiating result).
