Hello everyone. Today I want to talk with you about the concept of strategic fit. In my opinion, this is one of the most important aspects of overall corporate strategy as well as supply chain strategy. So what is strategic fit?
Some people say strategic fit is the way an organization's activities complement each other. to create competitive advantages. With this view of fit, the focus is on internal, complementary synergies and reinforcing activities within the organization. Other people conceptualize fit by saying it's all about how well a company's resources and capabilities match with opportunities in the external environment. So rather than fit being driven by internal consistency of actions, this view of fit is more focused on how an organization leverages its strengths.
relative to industry structure. In my opinion, fit is not just internally or externally focused. Rather, fit requires both of these views.
You need your internal actions to be consistent so they're strategically focused on creating synergies. But, externally, you also need to have a logical alignment between the external environment and your corporate strategy. So then, why is fit important?
When a firm does achieve strategic fit, competitive advantage usually follows. This is because consistent actions reinforce each other in a way that creates economic value. Fit also makes a competitive advantage much more sustainable by locking out competitors who try to replicate this type of complex, intangible resource. Porter suggested there are three main types of fit.
First would be simple consistency of actions and strategy that prevents different actions from canceling each other out. The second type of fit would be activities that reinforce each other. reinforce and complement each other to create synergies. And third, optimization efforts that eliminate redundant efforts and minimize waste are a final type of fit. So like most high-level strategic management topics, now we should ask, what does fit have to do with supply chain management?
Well, to me, fit is the most important strategic concept for supply chain managers to understand. As supply chain managers, we have an opportunity to greatly influence fit and drive competition. advantage.
Supply chains are complex, integrated systems that require consistent and focused actions. This is precisely the definition of strategic fit. Our supply chain strategies and capabilities need to be aligned with an overall internal corporate strategy as well as the external environment.
Let me give you a few examples of what I mean by this. Think back to 2009 during the Great Recession or any other time when a lot of American consumers were struggling financially. So, During those times, many companies were also struggling, because people simply did not spend as much money on their products or services. However, Walmart often tends to weather adverse macroeconomic conditions better than a lot of companies, because of their low-cost strategy and because of their intense focus on fit. When consumers do not have a lot of discretionary income, they become more price sensitive.
Well, Walmart is always focused on providing the lowest cost products and services, to its customers. Their marketing efforts reinforce that their brand represents low cost. Their store operations are lean and minimize waste to reduce cost. Their supply chain functions are constantly looking for ways to drive down costs. They buy in large quantities to take advantage of volume discounts.
They leverage consolidation to ship in full truckload quantities. They efficiently cross-stock products through their distribution centers, and they minimize safety stock levels of inventory. All these functional actions are consistent with the overall low-cost corporate strategy, and these activities reinforce each other. For example, shipping full truckload quantities would be difficult if Walmart did not buy in bulk. But, because they do buy in bulk, their sourcing activities help reinforce their transportation activities, which then reinforce their...
their low-cost strategy. Likewise, their distribution center operations frequently cross-stock products to minimize touches, reduce movement, and drive down costs. These kinds of optimization efforts eliminate redundant movements and remove waste, which saves money.
Walmart has great strategic fit. Their low-cost strategy fits with the external environment and their internal capabilities fit with their overall strategy. Due to their outstanding fit, Walmart continues to be one of the largest and most successful companies in the world. Let's look at another example.
Another example where strategic fit drives competitive advantage and financial performance. Let's travel back in time for just a moment. Believe it or not, there was a time when Kmart was bigger than Walmart. Just pause and think about that for a minute.
And although Kmart was bigger, Walmart was closing in on them fast. Both companies realized a heavyweight battle was on the horizon, and both companies made very conscious, strategic decisions that would ultimately determine their fates. Kmart invested heavily in marketing and promotional activities. They had blue light special store events, they developed celebrity-branded product lines, and they dominated advertisements all over print media and on TV.
On the other hand, Walmart... Walmart invested in logistics capabilities. They developed a modern distribution network, invested in barcode technologies, and began to leverage sharing point-of-sale information with their suppliers. Now fast forward a few decades, and we can clearly see the results of these strategic decisions. Kmart is going bankrupt, and Walmart is thriving.
Why? I think it all has to do with strategic fit. Kmart and Walmart are both big box, discount retailers. Therefore, they should be selling products at prices that are lower than typical market averages.
Well, Walmart took actions that fit with this basic premise. Their strategy of low cost, fit with the industry that they were in, and their focus on logistics capabilities drove down costs so they could sell products at even lower prices. Everything Walmart did, and still does, was consistent and reinforced their strategic direction.
On the other hand, Kmart's actions did not fit with a discount retail market. They focused on differentiation and aggressively marketed those efforts. The problem is differentiated products and marketing campaigns are costly and do not fit in a low-cost industry.
Their actions were not consistent and did not reinforce each other. Consequently, Walmart gained a large sustainable competitive advantage over Kmart. And the rest is history.
So, As supply chain managers should always remember, FIT drives competitive advantage because it helps firms reduce costs or increase differentiation. It takes advantage of the complex and integrated nature of the entire system of supply chain activities. FIT makes the whole totality of operations matter more than the sum of individual parts. FIT is difficult to achieve because it requires focused and consistent actions across individuals, functional groups, even entire organizations. These consistent actions must match with external environmental conditions.
Achieving all this within a firm is difficult, and to be another firm trying to copy it, well, that's nearly impossible. And that's exactly why FIT is such a good source of sustainable competitive advantage.