Three levels of strategic fit

Strategic positions and approaches can help a group be competitive in the short term. How then to ensure this sustainable; meaning competitive in the long term?

For a long time, this was thought to be operational excellence. Japanese companies like Toyota that had mastered Lean and other techniques, had ‘operational core competencies’ that were thought to be a sustainable source of advantage. However, this is false. These techniques were not secret; they were studied and lauded the world over, such that other companies have followed them. Whether or not they have reached they heights of Toyota in their efficiency is not the point; the point is they can negate much of this advantage such that it’s not enough on it’s own to be a strategy. In the strategic arms race, operational effectiveness is now table stakes, and those without it will die. It will not separate those that remain.

Copying how someone performs a single activity is much easier than copying the entire activity set and how they reinforce each other. This is the concept of strategic fit.

Consider the case of IKEA. Whilst at the time, their offering hit a sweet-spot for an overserved market; here was a cheaper alternative that offered modern flat-packed furniture. Given their success, why do they have no real competitors? Why has no-one copied their model identically with any success?

One of the reasons is strategic fit. IKEA has selected activities that reinforce each other, as well as chosen not to do others, which make the entire set harder. You cannot ‘just’ copy the flat-packed furniture and hope to compete. First you would need a staggering amount of products, from couches to glass jars; they are truly a one-stop-shop. You need large warehouses in strategic catchment areas to drive volume of foot traffic. You need to design a self-service model, where customers walk through a curated maze of products, and pick them up from storage areas at the basement. You need sufficient information on demand such that you balance inventory costs and still meet supply. You need an interplay of cultural design and food that you can offer a cafeteria that’s almost as desirable as your furniture (author is self-confessed Swedish meatball addict).

It is not simply that IKEA has the cheapest source of materials, or that their warehouse system is more efficient than any other (though it likely plays a part). You can see all the pieces a competitor would have to get right to be on par with them. If they could only copy each one at 99% effectiveness, then the more activities they have interlaced, the worse that copy would become (99% * 99% * 99% … ).

This is also true for software.

Hubspot is a marketing software suite that has recently taken on goliaths such as Salesforce and is able to hold its own. Part of that is the strategic fit of activities they’ve selected. Let’s use them as a lens to look through the three levels of strategic fit.

First order fit (simple consistency)

This occurs when the activities tie into the company strategy. It means that the activities will add up to a cumulative benefit and not cancel each other out. Hubspot are aiming for a dominant strategy – to be a better product offering at a lower price. It attracts the best talent in SaaS & Marketing spheres to ensure they offer a compelling product that’s fit-for-purpose.

Second order fit (activities are reinforcing)

Hubspot built add-on products – such as their CRM – that they offered for free. It understands the value of ecosystems and switching costs. By developing something as valuable as a CRM – and offering it for free – it immediately took market share and ownership of customer data, such that it could better understand it’s prospects and target them more effectively in future; both with products and marketing tactics.

Third order fit (optimisation of effort)

As a differentiating activity – and to be considered a better product at a lower price – Hubspot has invested heavily in content marketing and eLearning. It has created its own industry certifications and offers free courses for marketers. Marketers are drawn to the content because of its inherent value, which develops trust and credibility. As audiences go through this content, Hubspot have a host of information about how engaged the learner is, where in the buying cycle they are, and can better target them with future offers. However it doesn’t stop there; this effort is self-optimising because by creating destination content, it drives up Hubspot’s SEO and domain authority. This is an activity that is both incredibly value-adding to customers whilst being a marketing strategy in itself. This is a two-for-one that not many industries enjoy. The coordination of information between activities is optimisation and something inherently difficult for competitors to clone.

Great, enduring strategies don’t rely on just what you do, or how you do it, but the combination and synergies between them.

References

Porter, M. (1996). What is strategy?. Harvard Business Review, (Nov-Dec 1996).

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