Trade-offs are essential to strategy. They create the need for choice and purposefully limit what a company offers.
From the HBR Magazine by Michael Porter (November–December 1996)
A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both. Strategic positioning means performing different activities from rivals’ or performing similar activities in different ways.
Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.
The essence of strategy is choosing to perform activities differently than rivals do.
Strategic positions emerge from three distinct sources, which are not mutually exclusive and often overlap.
- First, positioning can be based on producing a subset of an industry’s products or services. “variety-based positioning”.
- A second basis for positioning is that of serving most or all the needs of a particular group of customers. “needs-based positioning”.
- The third basis for positioning is that of segmenting customers who are accessible in different ways. Although their needs are similar to those of other customers, the best configuration of activities to reach them is different. “access-based positioning”.
“What is strategy?” Strategy is the creation of a unique and valuable position, involving a different set of activities. If there were only one ideal position, there would be no need for strategy. The essence of strategic positioning is to choose activities that are different from rivals’.
Trade-offs arise for three reasons. The first is inconsistencies in image or reputation. Second, and more important, trade-offs arise from activities themselves. Different positions (with their tailored activities) require different product configurations, different equipment, different employee behavior, different skills, and different management systems. Finally, trade-offs arise from limits on internal coordination and control. By clearly choosing to compete in one way and not another, senior management makes organizational priorities clear. Companies that try to be all things to all customers, in contrast, risk confusion in the trenches as employees attempt to make day-to-day operating decisions without a clear framework.
Read the full HBR article to read the examples of IKEA, Southwest Airlines, and the Vanguard Group.
Thank you Austin Chan and Unsplash for the header image.