Five Tests of a Good Strategy
Michael Porter is the guru of strategy. And many of his ideas have been made more accessible by Joan Magretta of Harvard Business School. In fact, I would strongly recommend everyone to read her outstanding ‘Understanding Michael Porter: The Essential Guide to Competition and Strategy.’
In an article in HBR, Magretta writes about Porter’s five tests to figure out whether your strategy is good or bad. She writes: Strategy is about making choices that lead to sustainably superior performance. And the kind of performance I’m talking about can, and must, be rigorously defined and quantified. Porter’s work provides that rigor, as it defines the economic fundamentals of competition and strategy. And most important for managers, 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.
Visual courtesy:https://www.flickr.com/photos/mollivan_jon/