WHAT MAKES A STRATEGY A WINNER? LO 1-6 Identify the three tests of a winning strategy. To pass the fit test, a strategy must exhibit fit along three dimensions: (1) external, (2) internal, and (3) dynamic. Three tests can be applied to determine whether a strategy is a winning strategy: 1. The Fit Test: How well does the strategy fit the company's situation? To qualify as a winner, a strategy has to be well matched to industry and competitive conditions, a company's best market opportunities, and other pertinent aspects of the business environment in which the company operates. No strategy can work well unless it exhibits good external fit with respect to prevailing market conditions. At the same time, a winning strategy must be tailored to the company's resources and competitive capabilities and be supported by a complementary set of functional activities (i.e., activities in the realms of supply chain management, operations, sales and marketing, and so on). That is, it must also exhibit internal fit and be compatible with a company's ability to execute the strategy in a competent manner. Unless a strategy exhibits good fit with both the external and internal aspects of a company's overall situation, it is likely to be an underperformer and fall short of producing winning results. Winning strategies also exhibit dynamic fit in the sense that they evolve over time in a manner that maintains close and effective alignment with the company's situation even as external and internal conditions change. 11 2. The Competitive Advantage Test: Is the strategy helping the company achieve a competitive advantage? Is the competitive advantage likely to be sustainable? Strategies that fail to achieve a competitive advantage over rivals are unlikely to produce superior performance. And unless the competitive advantage is sustainable, superior performance is unlikely to last for more than a brief period of time. Winning strategies enable a company to achieve a competitive advantage over key rivals that is long-lasting. The bigger and more durable the competitive advantage, the more powerful it is. 3. The Performance Test: Is the strategy producing superior company performance? The mark of a winning strategy is strong company performance. Two kinds of performance indicators tell the most about the caliber of a company's strategy: (1) competitive strength and market standing and (2) profitability and financial strength. Above-average financial performance or gains in market share, competitive position, or profitability are signs of a winning strategy. Page 14 A winning strategy must pass three tests: 1. The fit test 2. The competitive advantage test 3. The performance test Strategies-either existing or proposed-that come up short on one or more of the preceding tests are plainly less desirable than strategies passing all three tests with flying colors. New initiatives that don't seem to match the company's internal and external situations should be scrapped before they come to fruition, while existing strategies must be scrutinized on a regular basis to ensure they have good fit, offer a competitive advantage, and are contributing to above-average performance or performance improvements. Failure to pass one or more of the three tests should prompt managers to make immediate changes in an existing strategy.