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The importance of fit among functional policies is one of the oldest ideas in strategy. Gradually, however, it has been supplanted on the management agenda. Rather than seeing the company as a whole managers have turned to “core” competencies, “critical” resources, and “key” success factors. In fact, fit is a far more central component of competitive advantage that most realize.
Fit is important because discrete activities often affect one another.
There are three types of fit, although they are not mutually exclusive:
First-order fit is simple consistency between each activity (function) and the overall strategy.
Second-order fit occurs when activities are reinforcing.
Third-order fit goes beyond activity reinforcement which is called optimization of effort.
The importance of fit among functional policies is one of the oldest ideas in strategy. Gradually, however, it has been supplanted on the management agenda. Rather than seeing the company as a whole, managers have turned to “core” competencies, “critical” resources, and “key” success factors. In fact, fit is a far more central component of competitive advantage than most realize.
Fit is important because discrete activities often affect one another. A production line with high levels of model variety is more valuable when combined with an inventory and order processing system that minimizes the need for stocking finished goods, a sales process equipped to explain and encourage customization, and an advertising theme that stresses the benefits of product variations that meet a customer’s special needs. Such complementarities are pervasive in strategy. Although some fit among activities is generic and applies to many companies, the most valuable fit is strategy-specific because it enhances a position’s uniqueness and amplifies trade-offs.
There are three types of fit, although they are not mutually exclusive.
1. First-order fit is simple consistency between each activity (function) and the overall strategy. Consistency ensures that the competitive advantages of activities cumulate and do not erode or cancel themselves out. It makes the strategy easier to communicate to customers, employees, and shareholders, and improves implementation through single-mindedness in the corporation.
2. Second-order fit occurs when activities are reinforcing. For example, Bic Corporation sells a narrow line of standard, low-priced pens to virtually all major customer markets through virtually all available channels. As with any variety-based positioning serving a broad group of customers, Bic emphasizes a common need (low price for an acceptable pen) and uses marketing approaches with a broad reach (a large sales force and heavy television advertising). Bic gains the benefits of consistency across nearly all activities, including product design that emphasizes ease of manufacturing, plants configured for low cost, aggressive purchasing to minimize material costs, and in-house parts production whenever the economics dictate.
Yet Bic goes beyond simple consistency because its activities are reinforcing. For example, the company uses point-of-sale displays and frequent packaging changes to stimulate impulse buying. To handle point-of-sale tasks, a company needs a large sales force. Bic’s is the largest in its industry, and it handles point-of-sale activities better than its rivals do. Moreover, the combination of point-of-sale activity, heavy television advertising, and packaging changes yields far more impulse buying than any activity in isolation could.
3. Third-order fit goes beyond activity reinforcement to what is called optimization of effort. The Gap, a retailer of casual clothes, considers product availability in its stores a critical element of its strategy. The Gap could keep products either by holding store inventory or by restocking from warehouses. The Gap has optimized its effort across these activities by restocking its selection of basic clothing almost daily out of three warehouses, thereby minimizing the need to carry large in-store inventories. The emphasis is on restocking because the Gap’s merchandising strategy sticks to basic items in relatively few colors. While comparable retailers achieve turns of three to four times per year, the Gap turns its inventory seven and a half times per year. Rapid restocking, moreover, reduces the cost of implementing the Gap’s short model cycle, which is six to eight weeks long.
Coordination and information exchange across activities to eliminate redundancy and minimize wasted effort are the most basic types of effort optimization. But there are higher levels as well. Product design choices, for example, can eliminate the need for after-sale service or make it possible for customers to perform service activities themselves. Similarly, coordination with suppliers or distribution channels can eliminate the need for some in-house activities, such as end-user training.
In all three types of fit, the whole matters more than any individual part. Competitive advantage grows out of the entire system of activities. The fit among activities substantially reduces cost or increases differentiation. Beyond that, the competitive value of individual activities—or the associated skills, competencies, or resources—cannot be decoupled from the system or the strategy. Thus in competitive companies it can be misleading to explain success by specifying individual strengths, core competencies, or critical resources. The list of strengths cuts across many functions, and one strength blends into others. It is more useful to think in terms of themes that pervade many activities, such as low cost, a particular notion of customer service, or a particular conception of the value delivered. These themes are embodied in nests of tightly linked activities.
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