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.
