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May 30 - May 30, 2021
Conversely, some value propositions target customers who are underserved (and hence underpriced) by other offerings in the industry.
The first test of a strategy is whether your value proposition is different from your rivals. If you are trying to serve the same customers and meet the same needs and sell at the same relative price, then by Porter’s definition, you don’t have a strategy.
A distinctive value proposition, Porter explains, will not translate into a meaningful strategy unless the best set of activities to deliver it is different from the activities performed by rivals. His logic is simple and compelling: “If that were not the case, every competitor could meet those same needs, and there would be nothing unique or valuable about the positioning.”
Progressive’s target customer posed a special challenge. How do you turn a bad driver into a profitable customer? Progressive needed a different value chain from the industry’s standard one. First, Progressive tackled risk assessment in a different way, building a massive database with more granular indicators that better predicted the probability of accidents.
As Web-based travel sites became a popular distribution channel, most airlines rushed to sign up (a bad decision for industry structure, since it pushes customers to buy on price alone). Not Southwest. Its passengers buy tickets directly on the Southwest Web site, bypassing other channels and allowing Southwest to avoid sales commissions.
Choices in the value proposition that limit what a company will do are essential to strategy because they create the opportunity to tailor activities in a way that best delivers that kind of value.
If the same value chain can deliver different value propositions equally well, then those value propositions have no strategic relevance.
No cookbook or expert system can reliably churn out winning strategies. By definition, strategy is about creating something unique, making a set of choices that nobody else has made.
Trade-offs are the strategic equivalent of a fork in the road. If you take one path, you cannot simultaneously take the other.
If you have a strategy, you should be able to link it directly to your P&L.
If you are successful and competitors aren’t asleep at the switch, they will try to copy what you do. But trade-offs will get in their way.
Ways of delivering value can be copied. But where there are trade-offs, the copycat will pay an economic penalty.
Netflix’s 50-plus regional warehouses, backed by a state-of-the art distribution system, could supply a wider library of films than Blockbuster’s 5,000-plus local stores. Blockbuster tried—and failed—to have it both ways, adding Netflix’s value proposition on top of its own.
When you try to offer something for everyone, you tend to relax the trade-offs that underpin your competitive advantage.
The fallacy here is that good strategies don’t rely on just one thing, on making one choice. Nor do they typically result from even a series of independent choices. Good strategies depend on the connection among many things, on making interdependent choices.
Fit means that the value or cost of one activity is affected by the way other activities are performed.
Synergy
None of these choices is, by itself, the “low cost” solution. But when you step back and look at the whole, as a system, you realize that Zara is willing to make a suboptimal choice in one area in order to optimize the whole.
Rather than pay big-name designers big bucks to create something new, the company has scouts around the world looking for the latest fashion trends at shows and in nightclubs. Its large team of in-house designers can create a new collection in under a month and can modify existing collections in a couple of weeks. The size of the team allows Zara to be a fast copier, getting those new designs into production quickly.
Expressed mathematically, consistency means that 1 + 1 + 1 = 3, and not some number less than 3. Inconsistent activities make the whole less than the sum of the parts.
Porter has created a tool he calls an “activity system map” to chart a company’s significant activities, their relationship to the value proposition, and to each other.
Were you to fully map IKEA’s activities, you’d end up with an extremely dense and tangled web. For strategy, this is a good thing. Conversely, a map with sparse connections likely signals that the strategy is weak.
Instead of trying to determine which activities are core, Porter asks a different question: Which activities are generic and which are tailored? Generic activities—those that cannot be meaningfully tailored to a company’s position—can be safely outsourced to more efficient external suppliers. However, Porter argues that outsourcing is risky for activities that are or could be tailored to strategy, and especially for those activities that are strongly complementary with others.
Outsourcing can not only limit the opportunities for uniqueness and fit in the company’s strategy but also push an entire industry into greater homogenization.
Porter observes that companies with strong fit are typically superior in both strategy and execution, and thus they are less likely to attract imitators in the first place.
Continuity of strategy does not mean that an organization should stand still. As long as there is stability in the core value proposition, there can, and should, be enormous innovation in how it’s delivered.
Ten Practical Implications
A distinctive value proposition is essential for strategy. But strategy is more than marketing. If your value proposition doesn’t require a specifically tailored value chain to deliver it, it will have no strategic relevance.
So in many companies, strategy is built around the value proposition, which is the demand side of the equation. But a robust strategy requires a tailored value chain—it’s about the supply side as well, the unique configuration of activities that delivers value. Strategy links choices on the demand side with the unique choices about the value chain (the supply side). You can’t have competitive advantage without both.
The worst mistake—and the most common one—is not having a strategy at all. Most executives think they have a strategy when they really don’t.
A disruptive technology is one that invalidates value chain configurations and product configurations in ways that allow one company to leap ahead of another and/or make it hard for incumbents to match or respond because of the existing assets they have.
The business model is the most basic step in thinking about the viability of a company. If you’re satisfied with just being viable, stop there. If you want to achieve superior profitability then strategy—as I define it—will take you to the next level.
