The term strategic fit (or alignment) is used to indicate how a strategy needs to be âfittedâ. (âalignedâ) with its external context and how the internal organization ...
strategic fit1 Derek F. Channon and John McGee
Seen from a systems perspective, the task of management is to keep the organization in a controlled balance against the multiple and diverse forces in the broader strategic context. The term strategic fit (or alignment) is used to indicate how a strategy needs to be “fitted” (“aligned”) with its external context and how the internal organization needs to be properly meshed (“aligned”) with the strategy. The strategic fit of strategy with the external context and of strategy with internal organization is a prime task of the general management team. The essential intangible barrier to strategy imitation is strategic fit. The way in which a firm’s activities and capabilities fit together is often achieved by sustained learning (see ORGANIZATIONAL LEARNING) and experimentation over time and cannot readily be imitated by would-be followers. For example, all car assemblers know that BMW produces its cars to enhance driver appeal, but it is extraordinarily difficult to replicate the way in which BMW has learned to fit everything together. Strategic fit is the classic response to the economic analyst who says that all profits decay: “yes, maybe – but look how long it takes.” Strategic fit occurs usually in related diversified concerns (see RELATED DIVERSIFICATION) as a result of superior competitive position arising from overall lower cost and the successful transfer of core skills, technology, and managerial know-how between businesses. The earlier concepts of synergy and shared experience have similar meanings. Strategic fit, however, may apply in apparently unrelated businesses where financial synergy may be found. For example, a high cash flow business may financially complement a business that is a high capital user. Examples of this phenomenon include Reo Stakis – a combination of casinos and hotels – the Ladbroke Group and Donald Trump’s empire, all of which are engaged in similar sets of activities. Diversification into businesses in which shared technology, marketing, and production skills are required can lead to economies of scope when the costs of operating two or more businesses are
less than operating each individually. The key to such cost reductions is therefore diversification into businesses with strategic fit. Market-related fit occurs when the activity cost chains of different businesses overlap such that they attempt to reach the same consumers via similar distribution channels, or are marketed and promoted in similar ways. In addition to such economies of scope, it may also be possible to transfer selling skills, promotion and advertising skills, and product positioning/differentiation skills across businesses. Care must, however, be taken to ensure that market-related fit is possible. Successful examples include Canon’s strategic position in cameras and photographic equipment being logically extended into copying and imaging equipment, and Honda’s position in motorcycles being extended into other activities using engines, including automobiles and lawnmowers. However, not all such moves are successful. Thus, British American Tobacco (BAT) found that selling branded cosmetics was different than selling branded tobacco items. Operating fit is achieved where the potential for cost sharing or skills transfer can occur in procurement, R&D, production, assembly, and/or administration. Cost sharing among these activities can lead to economies of scale. Again, successes such as the sale of life insurance policies by retail banking branches can be identified. Similarly, failures are frequently due to inabilities to insure integration between activities from different businesses brought together by acquisition. Management fit occurs when different business units enjoy comparable types of entrepreneurial administrative or operating problems. This type of gain is very difficult to achieve due to differences in corporate culture. Classic failures in achieving such fit gains occurred in the attempted diversification moves by the oil industry majors after the first oil price shock in 1973. Redefinitions of their businesses into “energy” and “raw materials” encouraged moves into minerals, coal, and gas. Most of these moves were serious failures, or the expected strategic fit did not materialize. Ironically, the only strategic fit which is almost certain to be achieved is the financial fit. The operational strategic fits have lower probabilities
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2 strategic fit of success, and that for marketing being higher than that for production, which, in turn, is higher than that for R&D. The McKinsey (see MCKINSEY 7S MODEL) (Waterman, 1982) is a classic example of model designed to explain and portray internal strategic fit where the 7Ss represent characteristics of the organization, namely, strategy, structure, systems, style, staff, skills, and shared values. The strategic fit concept has also been criticized as being too static and limiting, focusing as it does on existing resources and the existing environment rather than seeking out the future opportunities and threats which are the focus of firms with strategic intent. However, lack of consistency between a firm’s strategy and its internal and external environments can be a significant contributor to corporate failure. For example, expansions into foreign markets frequently face difficulties because the foreign market context is different, and therefore a modified strategic approach is required (e.g., Laura Ashley in the US market, Disney with EuroDisney, and General Motors in Japan all faced difficulties, see Grant, 2011). Similarly, failure to match a strategy with resources can lead to an overstretching of limited resources.
ENDNOTES 1 Original article by Derek F. Channon. Updated
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