As management consultants we know at Zircon that it is crucial to have a good business strategy and to use it to work with our clients to help them develop a future focused/forward looking and sustainable strategy. According to Michael Porter, a strategy is about making choices that lead to a sustainably superior performance.
Michael Porter has written many books on strategy, one of which explains the Five Tests of a Good Strategy, looking at our choices essential in business particularly during times of uncertainty.
How do some companies make it through times of uncertainty?
According to Michael, performance can, and must, be rigorously defined and quantified. You need to define the economic fundamentals of competition and strategy, and most importantly, Porter’s five tests of good strategy can help you to tell the difference between a good strategic choice and bad strategic choice.
So what does a good strategic choice look like? You can apply the five tests.
1. Select a Distinctive Value Proposition. What is the requirement, the need, the impact? Which customers will be involved, at what price? Have you staked out a position that is different from your competitors?
2. Tailor your activities to that Value Proposition. Competitive advantage is key. By choosing to perform activities differently or to perform different activities than your competitors. 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.)
3. Make trade-offs. This may well be the hardest. It means accepting limits — saying no to some customers, for example, so that you can better serve others. Porter states trade-offs are an important source of profitability differences among competitors, 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.
4. The Fit 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.”
5. The Continuity 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.
Therefore making good strategic choices is dependent upon seamlessly integrating both the people and number, this is a central challenge to executives within organisations. It is common that MBA students and their professors 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. It is therefore important to develop a strategy which is holistic and considers the customers’ needs, the organisations ability to deliver quality, distinctive value, tailor activities, make trade-offs, ensure fit and continuity which leads on to financial success. Therefore to be great by choice, you have to make great choices.
In summary therefore, the Five Tests of a Good Strategy include:
1. A unique value proposition compared to other organizations
2. A different, tailored value chain
3. Clear tradeoffs, and choosing what not to do
4. Activities in the value chain that fit together and reinforce each other
5. Strategic continuity with continual improvement in realization
If you would like more information about developing a sustainable and future focused strategy for your organisation please do not hesitate to contact Dr Amanda Potter at firstname.lastname@example.org.