Three Tests of a Winning Strategy

L.O.5 – EXPLAIN THE TESTS THAT ARE USED TO IDENTIFY A GOOD STRATEGY. Three tests can be applied to determine whether a strategy has the potential to be a winning strategy: 1. The Fit Test 2. The Competitive Advantage Test 3. The Performance Test THE FIT TEST How well does the strategy fir the organisations situation? A good strategy will be well matched to industry and competitive conditions, an organisations most profitable or advantageous market opportunities and other pertinent aspects of the business environment in which the organisation operates. No strategy can work well unless it exhibits good external fit and is in sync with prevailing market conditions. It needs to be aligned with the key drivers in the organisations macro- and microenvironment to ensure that threats are mitigated, and opportunities can be exploited to the full. At the same time, a winning strategy has to be tailored to the organisation’s resources and competitive capabilities and be supported by a complementary set of functional activities. That is, it must also exhibit internal fit with the assets and skills that the firm has under its control. Assessment of a strategies internal fit should also assess whether the organisation has the ability to execute the strategy in a competent manner and so managers need to think about how feasible it is to deliver the strategy. Unless a strategy exhibits good fit with both external and internal aspects of an organisation’s overall situation, it is likely to under-perform and fall short of producing the desired results. The best strategies also exhibit dynamic fit in the sense that they evolve over time in a manner that maintains close and effective alignment with the organisation’s situation even as external and internal conditions change. There is a strong bod of evidence that being adaptable and exploiting a series of “transient” competitive advantages can be critical to success in rapidly changing environments. THE COMPETITIVE ADVANTAGE TEST Can the strategy help the organisation achieve a sustainable competitive advantage? Strategies that fail to achieve a durable competitive advantage over rivals are unlikely to produce superior performance for more than a brief period of time. Good strategies enable an organisation to achieve a competitive advantage over key rivals that is long lasting. The bigger and more durable the competitive advantage, the more powerful and sustainable it is. Advantages generally takes four forms: 1. It can result from a superior position in the marketplace 2. Superior resources – from patents and trademarks to relationships with suppliers and ownership of brands 3. Superior skills – unique competencies that the organisation has developed, such as the ability to mange mergers and acquisitions or the ability to bring inventions to market rapidly. 4. Superior adaptability – whether that is through the management of business ecosystems or the ability to read signals in the environment and anticipate opportunities before rivals. THE PERFORMANCE TEST Is the strategy producing good organisational performance? The mark of a good strategy is strong organisational performance. Performance indicators typically include measures of profitability and financial strength, such as return on equity or the organisations credit rating or measures or competitive strength and market standing, such as market share or number of customer referrals. Above average financial performance or gains in market share, competitive position or profitability are signs of a good strategy. MORE DETAILED STRATEGY TESTS. These tests which compose of 10 questions assess the output of an organisation’s strategy processes. 1. Will your strategy beat the market? 2. Does your strategy tap a true source of advantage? 3. Is your strategy granular about where to compete? 4. Does your strategy put you ahead of trends? 5. Does your strategy rest on privileged insights? 6. Does your strategy embrace uncertainty? 7. Does your strategy balance commitment and flexibility? 8. Is your strategy contaminated by bias? 9. Is there conviction to act on your strategy? 10. Have you translated your strategy into an action plan? {page 18 for further details on each question}