In traditional “value chain” firms, the main activity tradeoff is between differentiation and low cost. Increasingly, however, firms are creating customer value through networks (eg AOL) or by providing knowledge-based solutions for customers (eg venture capital firm Kleiner Perkins).
This article discusses the quite different activity tradeoffs faced by these “value networks” and “value shops”. It then explores the tradeoff between exploitation (focusing on short-term performance) and exploration (focusing on transcending short-term activity tradeoffs). Finally, in reviewing the implications for managers, it discusses the problem of trying to manage different types of business (value chains, networks and shops) within the same corporation.
"Tradeoffs are essential to strategy. They create the need for choice and purposefully limit what a company offers.” Porter (1996, 69).
Tradeoffs determine the fit between the competitive context and the firm’s internal value creation. Porter (1996) defines tradeoffs as necessary choices along the firm’s efficient frontier, where any choice implies giving up one thing in return for another. A firm may, for example, experience difficulties in trying to meet a broad set of highly differentiated customer demands. The same activities may not be suitable for both serving inexpensive hamburgers and providing “haute cuisine” meals in a restaurant. Not only may the synergies between activities be sparse, but the activities themselves may also be in direct conflict with each other.
We suggest that the fundamental aim of strategy should be to transcend the immediate activity incompatibility tradeoffs, that is to improve the outcome on one dimension without worsening the outcome on any other. Transcending the activity tradeoffs, however, requires exploring new technologies or new ways of doing business, rather than just exploiting present resources.
The traditional model of strategy is rooted in the old economy. It gave, and still gives, useful guidelines about competitive advantage for industrial firms – service businesses as well as manufacturers – with many tangible assets and many employees. It focuses on issues such as where to compete within the value chain and the tradeoff between differentiation and cost efficiency (Porter 1985).
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