Strategic Trade Offs - Source of Lasting Competitive Advantage

12-December-2016 12:05
in Small Business Strategy
by Admin

In my day to day work, I often review the strategic plans of my clients.  Too often, the strategies are generic, cover-all-the-bases, consensus-driven statements that are more descriptive of what they want to achieve rather than a clear, concise outline of how these goals will be achieved.  These "Wish List" style strategies are not really strategies at all.  They are usually an attempt to be "all things to all men".  I believe that this type of thinking will seriously undermine the long term prospects for your small business.  Whenever I see a business trying to do anything and everything that their customers or other important stakeholders want them to do, It is obvious that no choices have been made and that no thought has been given to any potential trade-offs.  Indeed, many of the objectives that the small businesses that I work with are trying to achieve through their strategy are mutually exclusive.  This is a sure sign that trade-offs haven’t been made. If trade-offs haven’t been made, you have very little chance of attaining any type of competitive advantage and no chance of sustaining that competitive advantage.  

In business, especially in the early days of your life as a small business owner, the temptation is to believe that "more is always better".  More customers and more products and services mean more sales and more profits.  The idea of saying no to any customer seems almost heretical.  The general rule of thumb seems to be that if you can do it, you should do anything and everything that your customers might ask you to do.  Not to do so would be to leave money on the table and would be an admission of weakness to your customers, or so it feels.  I know exactly what it is like from personal experience to be in this situation.  When money is tight you are happy to take it from anywhere.  Whilst I certainly wouldn't advocate against taking money that is on the table in order to survive, the reality is that your business will never achieve any lasting prominence in its field trying to be "all things to all men".  In my experience, superior business performance is a consequence of good strategy and at the heart of good strategy are trade-offs.  Companies as diverse as BMW, McDonald's, Apple and IKEA have all achieved sustained competitive advantages in their fields by making trade-offs.  So, what exactly is a strategic trade-off and why are they so important?

Simply put, a trade-off is a strategic fork in the road.  If you take one path you cannot take the other without retreading your steps.  Real trade-offs can, therefore, keep competitors at bay.  If you achieve any kind of prominence in your field, you will attract the attention of your competitors and they will respond by attempting to imitate whatever it was that made you successful.  If there are no trade-offs, any good idea can be copied.  Product features can be copied.  Services can be copied.  Where there are trade-offs, however, products and services are not just different.  They are inconsistent.  One choice precludes or seriously compromises the other.

We can illustrate this idea using the example of McDonalds at the turn of the century.  They had established their market leadership in fast food by focusing on speed and consistency and all their operating systems were geared towards these goals.  However, with several rivals beginning to erode the lead that they enjoyed, they began to nervously look around for ways to improve their offering.  Burger King, with their promise to the customer to "have it your way", was the model that they chose to follow and they launched the "Made for You" strategy.  To support the ability of the restaurants to deliver on this new promise, kitchen refurbishments across the whole McDonald's estate were necessary at a cost of over half a billion dollars.  However, the true cost of the "Made for You" strategy came at the expense of McDonalds reputation for speed and consistency.  A customised burger takes longer to make and the greater the degree of customisation the more difficult it is to achieve consistency.  As McDonalds learned the hard way, there are trade-offs involved in each of these outcomes.  More customisation means less speed and consistency.  Ultimately, franchise owners had to choose in implementing the "Made for You" strategy between taking a hit to their profits by employing more staff or risk irritating their customers with long wait times.  It couldn't copy Burger King's strategy without messing up its own.

Michael Porter teaches that in attempting to copy a strategy from a competitor where trade offs have been made, the only two choices are "straddling", in which you try to match the benefits of the new position whilst maintaining your existing position, or completely repositioning, in which you choose to retrace your steps to the fork in the road and effectively start again.  "Straddling", as McDonald's attempted to do with the "Made for You" strategy, is the most commonly adopted approach as repositioning an established business is extremely hard to do.  However, attempts to "straddle" two competitive positions simultaneously usually end badly.  Examples of "straddling" not working as hoped are Blockbuster's attempts to incorporate the Netflix business model into its own and British Airways attempts launch the budget airline Go Fly.

Hopefully, I've made it clear that there are significant advantages to engaging with difficult strategic trade-offs and that those who try to be all things to everyone, effectively "straddling" multiple positions in the market place will eventually struggle. Even so, the "less is more" strategy is very much the road less traveled in business.  The arguments behind a "more is always better" strategy are familiar and initially compelling.  For example:

  • the incremental cost of adding a feature is minimal and we need the revenue growth
  • we have to match what our rivals are offering
  • this is what our customers tell us they want.

The truth is, however, that it is only by being deliberately unresponsive to some needs that your business can be genuinely responsive to other needs.  Businesses that embrace the "less is more" philosophy underpinning this concept of strategic trade-offs are choosing to make some customers unhappy.  They are accepting that in matters of strategy, sometimes the customer is wrong.  Customers naturally want maximum value and if you listened to everything they said, you might be pressured to compromise some of the trade-offs that you have made to be excellent at what you specialise in.  A customer that complains about having to assemble their own IKEA furniture has missed the point and the trade-off that was essential in order for the company to provide low cost, stylish furniture.  A customer that complains that Aldi stocks too narrow a range of products and not enough branded goods has missed the point and the trade-off that was essential in order for the company to offer deeply discounted prices on core grocery products.  

What are the strategic trade-offs in your small business?  What will you choose not to do?  These trade-offs, if made and defended, can become a source of lasting competitive advantage for many years, whilst those businesses, large or small that try to offer something to everyone will either ignore or relax the trade-offs that would otherwise underpin their competitive advantage.  They will find themselves struggling to achieve any kind of lasting prominence in their fields.  For those of you looking to establish a strategy built upon a durable foundation, please give some consideration to the strategic trade-offs that your business faces.  If you need some help at the crossroads in deciding which route to go down, then contact Continuous Business Planning today.  We can help you understand why less might well be more for your business and help you choose not only what to do but also what not to do.  The sustainability of your small business might just depend upon it.