The analysis of the role of operating excellence made by Michael Porter was widely accepted in academia and the market. Basically, the idea is that if several companies focus only on operational excellence seeking to offer more and more quality at a lower price, they become very similar to each other.
Porter’s vision helps to understand how companies must operate to develop and deliver value to the consumer and, as such, encourage them to pay a fair price for the product or service. In this case, operating excellence is just a requirement.
Interested in knowing who Michael Potter was and how his ideas can improve the operating excellence of your business? That’s what we’re going to talk about in this article.
Who is Michael Porter?
Michael Eugene Porter was born in Michigan, USA in 1947 and was a professor at Harvard — the same institution where he obtained his doctorate in economics. He is well known for the theory of “ Porter’s Five Forces ” and for building a vast knowledge of strategic analysis, ideas recognized worldwide by governments, corporations and academic circles.
He applied economic theory to complex problems, and with that, the Harvard Business School and Harvard University formed the Institute for Strategy and Competitiveness, where he can delve into his research. This scholar was so important that most of the knowledge about strategies available today is based on Porter’s theories.
But his activity was not purely academic. He has helped some organizations put their theories into practice. More than that, he acted as a consultant to several governments. His theories are widely applied in government policy making around the world. More recently, it started to dedicate itself to the development of a model of alignment between invested resources and results obtained for the health area.
What is operating excellence efficiency in Porter’s view?
Operating excellence efficiency consists of the search for improved performance using management techniques such as: total quality, strategic partnerships, reengineering and change management. Thus, it seeks to increase productivity, quality, profits and, as the name says, every detail of the operation.
This practice generates improvements that allow performing similar activities better than rivals. As Porter says in one of his articles , “many companies are unable to translate these gains into sustainable advantages”, which makes management techniques take the place of strategy.
What is strategy according to Porter?
Unlike operational efficiency, strategic positioning consists of performing activities that are different from the competition or, even if they are similar activities, they must be performed in a different way. In other words, to stand out strategically in the market, companies need to position themselves for a unique characteristic. Thus, they deliver greater value to customers, which allows them to charge higher prices.
Note that we are treating value and price with different meanings. Value is a set of benefits that the company delivers to solve a customer problem. The price, on the other hand, is the amount that the consumer is willing to pay to receive this value.
Operating excellence can mean lower unit costs, but that doesn’t necessarily translate into greater value for the consumer, nor does it translate into one-time value—which is what the strategy is all about. In the words of Porter , “strategy is the creation of a unique and valuable position that encompasses a different set of activities”.
What is Porter’s justification for differentiating between operating excellence efficiency and strategy?
Now that we have introduced the topic, we can go in search of a broader understanding of Porter’s idea. In the same article we cited above, he uses the example of the performance of Japanese industry in the 1980s. At the time, Easterners used operating excellence to gain market share in relation to traditional Western companies. They were so efficient that they were able to offer lower prices and, at the same time, superior quality.
However, according to Porter, few organizations were able to remain competitive over an extended period of time using this feature. This is because management techniques are easily imitable. In a short time, the competition starts to use the same models, acquire the same (or similar) technologies and seek the same productive improvements.
Those who were already entrepreneurs in the golden age of Japanese industry will easily remember the “total quality fever”. A legion of consultants specialize in teaching companies to apply Japanese models, popularizing methods and procedures. Obviously it is not the case to criticize this practice, as efficiency is also important. However, Porter warns that it is not enough.
It is important to remember that the noted Harvard professor was an economist, so he thinks as such. In other words, this whole theory is conceived based on how commercial exchanges occur and how companies are pressured in the economic environment. So, as competitors imitate each other’s techniques, everyone goes in the same direction and no one wins.
It is a mutually destructive practice that generates wear and tear and that only ends with the reduction of competition. According to Porter, this happens because the model generates a tendency for the most powerful companies to buy the smaller ones – something that can be noticed in the case of companies without differentiation.
What does the strategy depend on?
According to the theorist, strategic positioning comes from three different sources. Let’s look at each of them.
When it is focused on producing a set of products or services. It works when a company produces a particular product or service better than rivals.
In this case, the focus is on serving a specific segment of consumers. For this, the company needs to meet most or all of the needs of this group of customers, managing to differentiate itself by specializing in a public. Thus, it is able to deliver superior value that the competition cannot achieve while acting with a generic tactic.
It is also a segmentation, but based on customers who, despite having similar needs to other customer groups, are accessible in different ways. For example, geographic access may be different (urban or rural customers).
In short, Porter understands that operational efficiency is not enough, because the essence of strategy is to develop activities different from those of rivals. Only if the same set of activities were sufficient and could produce varied results—that is, to the point of satisfying all needs and reaching all consumers—that efficiency would determine business success.