Business Strategy Requires Trade-offs

May 03

In his paper, “What is Strategy?”, Michael Porter explores some popular misapplications of the term strategy in a business context. He first highlights a frequent counterfeit of strategy: operational effectiveness. This is an appealing counterfeit since it deals with activities, which he acknowledges are at the center of strategy. The disconnect he observes has to do with reluctance to make trade-offs, which requires prioritizing and positioning (a limiting activity). Instead, many managers attempt to treat all activities as though they could be equally optimized for any organization.

Activities, and more specifically interconnected systems of activities, should be the basis of strategy. A business’s choice of activities and method of execution have the ability to position it uniquely within a market. On the other hand, efforts to imitate competition in the choice and execution of activities can blur competitive positioning and undercut strategy.

Knowing which activities to perform, how to perform them and when there are opportunities to improve operational effectiveness requires managers and business leaders to make trade-offs. Often these trade-offs will limit growth opportunities while preserving competitive positioning. When the right trade-offs are made, it will be more difficult for competitors to effectively imitate activities that would endanger existing market share. Trade-offs are critical to an effective strategy.

Porter warns that “Among all other influences, the desire to grow has perhaps the most perverse effect on strategy. Trade-offs and limits appear to constrain growth. Serving one group of customers and excluding others, for instance, places a real or imagined limit on revenue growth. Broadly targeted strategies emphasizing low price result in lost sales with customers sensitive to features or service. Differentiators lose sales to price sensitive customers.

“Managers are constantly tempted to take incremental steps that surpass those limits but blur a company’s strategic position”

One take away is to watch for decisions that attempt to avoid a trade-off and instead accommodate multiple priorities simultaneously. When that occurs, it would be wise to ask whether the decision is likely to enhance or blur strategic positioning. If it blurs strategic alignment, it may be worth waiting.

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