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Thursday, January 26, 2012

Positive Leadership: Good Strategic Choices v Bad Strategic Choices

Good strategy makes the link between the specific actions leaders take and the financial results of those actions. Assuming you can determine who belongs on your bus, someone still must pick a destination and make great choices along the way.

Strategy is about making choices that lead to sustainably superior performance. Michael Porter's five tests of good strategy can help you to tell the difference between good choices and bad.
So what are good choices?
First, you must choose a distinctive value proposition. Which needs will you serve, which customers, at what relative price? Have you staked out a positioning that's different from rivals?
Second, and far less intuitive, you must choose to tailor your activities to that value proposition. Competitive advantage lies in the activities, in choosing to perform activities differently or to perform different activities than rivals. These ultimately are the choices that result in a company's ability to charge premium prices or to operate at lower cost. (Remember, we're talking about quantifiable performance.)
The third test of strategy, making trade-offs, may well be the hardest. It means accepting limits — saying no to some customers, for example, so that you can better serve others. Porter explains why trade-offs are an important source of profitability differences among rivals, and why trade-offs make it difficult for rivals to copy what you do without compromising their own strategies. The essence of strategy, says Porter, is choosing what not to do.
Fit is the fourth test. Great strategies are like complex systems in which all of the parts fit together seamlessly. Each thing you've chosen to do amplifies the value of the other things you do. That's how fit improves the bottom line. It also enhances sustainability. Says Porter, "Fit locks out imitators by creating a chain that is as strong as its strongest link."
Continuity is strategy's fifth test. While managers are often berated for changing too slowly and too little, it is also possible to change too much, and in the wrong ways. Faced with the latest ‘new thing’, managers must choose whether to embrace it or not. Continuity of strategy helps companies to make good choices about whether and how to change in the face of turbulence. Good choices will strengthen tailoring, sharpen trade-offs, and enhance fit.
So, is it great by choice...or making great choices? Academics tend to divide the world into two separate domains: people and numbers. There are the "soft" subjects like leadership and organisational behaviour, and the "hard" ones like finance, accounting, and operations. Of course this distinction only makes sense in the classroom. All great leaders know that the central challenge of performance is seamlessly integrating the two into a working whole. Good strategies do just that.