A Sustainable Strategic Position Requires Trade-offs

Choosing a unique position, however, is not enough to guarantee a sustainable advantage. A valuable position will attract imitation by incumbents, who are likely to copy it in one of two ways.

First, a competitor can reposition itself to match the superior performer. J.C. Penney, for instance, has been repositioning itself from a Sears clone to a more upscale, fashion-oriented, soft-goods retailer.
sustainable-strategic-position
A second and far more common type of imitation is straddling. The straddle seeks to match the benefits of a successful position while maintaining its existing position. It grafts new features, services, or technologies onto the activities it already performs.

For those who argue that competitors can copy any market position, the airline industry is a perfect test case. It would seem that nearly any competitor could imitate any other airline’s activities.

Any airline can buy the same planes, lease the gates, and match the menus and ticketing and baggage handling services offered by other airlines.

Continental Airlines saw how well Southwest was doing and decided to straddle. While maintaining its position as a full-service airline, Continental also set out to match Southwest on a number of point-to-point routes. The airline dubbed the new service Continental Lite. It eliminated meals and first-class service, increased departure frequency, lowered fares, and shortened turnaround time at the gate. Because Continental remained a full-service airline on other routes, it continued to use travel agents and its mixed fleet of planes and to provide baggage checking and seat assignments.

But a strategic position is not sustainable unless there are trade-offs with other positions. Trade-offs occurs when activities are incompatible. Simply put, a trade-off means that more of one thing necessitates less of another. An airline can choose to serve meals – adding cost and slowing turnaround time at the gate – or it can choose not to, but it cannot do both without bearing major inefficiencies.

Trade-offs creates the need for choice and protect against repositioners and straddlers. Consider Neutrogena soap. Neutrogena Corporation’s variety based positioning is built on a “kind to the skin,” residue-free soap formulated for pH balance. With a large detail force calling on dermatologists, Neutrogena’s marketing strategy looks more like a drug company’s than a soap maker’s. It advertises in medical journals, sends direct mail to doctors, attends medical conferences, and performs research at its own Skincare Institute. To reinforce its positioning, Neutrogena originally focused its distribution on drugstores and avoided price promotions.

Neutrogena uses a slow, more expensive manufacturing process to mold its fragile soap.

In choosing this position, Neutrogena said no to the deodorants and skin softeners that many customers desire in their soap. It gave up the large volume potential of selling through supermarkets and using price promotions. It sacrificed manufacturing efficiencies to achieve the soap’s desired attributes.

In its original positioning, Neutrogena made a whole raft of trade-offs like those, trade-offs that protected the company from imitators.

Trade-offs arise for three reasons. The first is inconsistencies in image or reputation. A company known for delivering one kind of value may lack credibility and confuse customers – or even undermine its reputation – if it delivers another kind of value or attempts to deliver two inconsistent things at the same time. For example, Ivory soap, with its position as a basic, inexpensive everyday soap would have a hard time reshaping its image to match Neutrogena’s premium “medical” reputation. Efforts to create a new image typically cost tens or even hundreds of millions of dollars in a major industry–a powerful barrier to imitation.

Second, and more important, trade-offs arise from activities themselves. Different positions (with their tailored activities) require different product configurations, different equipment, different employee behavior, different skills, and different management systems. Many trade-offs reflect inflexibilities in machinery, people, or systems.

The more Ikea has configured its activities to lower costs by having its customers do their own assembly and delivery, the less able it is to satisfy customers who require higher levels of service.

However, trade-offs can be even more basic. In general, value is destroyed if an activity is overdesigned or under designed for its use. For example, even if a given salesperson were capable of providing a high level of assistance to one customer and none to another, the salesperson’s talent (and some of his or her cost) would be wasted on the second customer.
Moreover, productivity can improve when variation of an activity is limited. By providing a high level of assistance all the time, the salesperson and the entire sales activity can often achieve efficiencies of learning and scale.

Finally, trade-offs arise from limits on internal coordination and control. By clearly choosing to compete in one way and not another, senior management makes organizational priorities clear. Companies that try to be all things to all customers, in contrast, risk confusion in the trenches as employees attempt to make day-to-day operating decisions without a clear framework.

Positioning trade-offs are pervasive in competition and essential to strategy. They create the need for choice and purposefully limit what a company offers.

They deter straddling or repositioning, because competitors that engage in those approaches undermine their strategies and degrade the value of their existing activities.

Trade-offs ultimately grounded Continental Lite.

The airline lost hundreds of millions of dollars, and the CEO lost his job. Its planes were delayed leaving congested hub cities or slowed at the gate by baggage transfers. Late flights and cancellations generated a thousand complaints a day. Continental Lite could not afford to compete on price and still pay standard travel-agent commissions, but neither could it do without agents for its full-service business. The airline compromised by cutting commissions for all Continental flights across the board. Similarly, it could not afford to offer the same frequent-flier benefits to travelers paying the much lower ticket prices for Lite service. It compromised again by lowering the rewards of Continental’s entire frequent-flier program. The results: angry travel agents and full-service customers.

Continental tried to compete in two ways at once. In trying to be low cost on some routes and full service on others, Continental paid an enormous straddling penalty. If there were no trade-offs between the two positions, Continental could have succeeded. But the absence of trade-offs is a dangerous half-truth that managers must unlearn. Quality is not always free. Southwest’s convenience, one kind of high quality, happens to be consistent with low costs because its frequent departures are facilitated by a number of low-cost practices – fast gate turnarounds and automated ticketing, for example.

However, other dimensions of airline quality – an assigned seat, a meal, or baggage transfer – require costs to provide.

In general, false trade-offs between cost and quality occurs primarily when there is redundant or wasted effort, poor control or accuracy, or weak coordination.

Simultaneous improvement of cost and differentiation is possible only when a company begins far behind the productivity frontier or when the frontier shifts outward. At the frontier, where companies have achieved current best practice, the trade-off between cost and differentiation is very real indeed.

After a decade of enjoying productivity advantages, Honda Motor Company and Toyota Motor Corporation recently bumped up against the frontier.

In 1995, faced with increasing customer resistance to higher automobile prices, Honda found that the only way to produce a less-expensive car was to skimp on features. In the United States, it replaced the rear disk brakes on the Civic with lower-cost drum brakes and used cheaper fabric for the back seat, hoping customers would not notice.

Toyota tried to sell a version of its best-selling Corolla in Japan with unpainted bumpers and cheaper seats. In Toyota’s case, customers rebelled, and the company quickly dropped the new model.

For the past decade, as managers have improved operational effectiveness greatly, they have internalized the idea that eliminating trade-offs is a good thing. But if there are no trade-offs companies will never achieve a sustainable advantage. They will have to run faster and faster just to stay in place.

As we return to the question, what is strategy? We see that trade-offs add a new dimension to the answer. Strategy is making trade-offs in competing.

The essence of strategy is choosing what not to do. Without trade-offs, there would be no need for choice and thus no need for strategy. Any good idea could and would be quickly imitated. Again, performance would once again depend wholly on operational effectiveness.

by: Harvard Business Review

Share This Post

Related Articles

Leave a Reply

© 2018 Human Resource Management. All rights reserved.
Skip to toolbar