via Michael Porter
Assess a strategy by its ability to pass five basic tests:
1. Unique Value: The Core. What does it mean to stake out a distinctive competitive position? The obvious answer lies in the unique value proposition a company offers its customers. This, in fact, is the first test of strategy.
2. Difficult to Copy Trade-offs: The Linchpin. The next test of strategy may well be the hardest. Making trade-offs means accepting limits—saying no to some customers, for example, so that you can better serve others. Trade-offs arise when choices are incompatible. Because a successful strategy will attract imitators, choices that are difficult to copy are essential. Some people, in fact, argue that competitive advantages can no longer be sustained. Trade-offs explain why that’s not true. Trade-offs are the economic linchpins of strategy for two reasons. First, they are an important source of differences in prices and costs among rivals. Second, they make it difficult for rivals to copy what you do without compromising their own strategies.
3. Different activities from rivals: A distinctive value proposition will translate into a meaningful strategy only if the best set of activities to deliver it is different from the activities performed by rivals. Competitive advantage lies in the activities, in choosing to perform activities differently or to perform different activities from rivals.
4. Coherent activities: Fit. The fourth test of strategy is fit. Fit has to do with how the activities in the value chain relate to one another. At one level, the idea of fit is completely intuitive. Every general manager knows the importance—and the difficulty—of aligning the various functional areas needed to compete in a business. But fit goes beyond simple alignment to amplify a competitive advantage and to make it more sustainable. Its role in strategy highlights yet another popular misconception: that competitive success can be explained by one core competence, the one thing you do really well. Good strategies depend on the connection among many things, on making interdependent choices. A common piece of advice for managers has been to focus on their core activities and to outsource the rest. Fit challenges that bit of conventional wisdom.
5. Continuity: The Enabler. Competition is dynamic. Everyone can name once-proud companies brought low by their failure to change. But continuity, as pedestrian as it sounds, is also essential. Although the spotlight is more often directed at companies that change too little, Porter’s fifth test is about an equal, if not greater, mistake: companies can change too much, and in the wrong ways. It takes time to develop real competitive advantage, to understand the value you create, to achieve tailoring, trade-offs, and fit. If you grasp the role of continuity in strategy, it will change your thinking about change itself. Paradoxically, continuity of strategy improves an organization’s ability to adapt and to innovate.