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Pulling ahead vs. catching up

Trade-offs and the quest for exceptional profitability

Four years ago, Deloitte Consulting LLP launched The Persistence Project to identify the management practices that contribute most to sustained, superior corporate performance.

Preliminary results have been published in the Harvard Business Review and in the peer reviewed academic journals Annals of Applied Statistics and Strategic Management Journal. This article is the sixth in a series, providing a preview of the project’s findings.

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Pulling ahead vs. catching up

Perhaps the most fundamental concept in strategy is the “trade-off.” In automobiles, for example, no one car is all of the biggest, fastest, most fuel efficient, safest, lowest carbon-emitting, most stylish and least expensive. Every vehicle manifests different trade-offs among these various dimensions of performance, and the choices customers make reveal which set of trade-offs they are most comfortable with. Competition in the automobile industry turns on the degree to which different automakers are able to discern these preferences and satisfy them. Since many of these trade-offs are rooted in laws of physics (e.g., it takes more energy to move faster or to move a larger car), it seems foolhardy to do other than to work within them in the pursuit of valuable differentiation.

At the same time, trade-offs are much maligned as a foundation for goal-setting and decision-making. The “tyranny of the OR” we are told, is an unnecessary limitation on the heights to which we can rise. Not lower cost or higher quality, but both; not customization or volume, but both; not higher performance or lower price, but, both. Focusing on trade-offs leads all too often to their unquestioned and frequently unnecessary acceptance.

There is merit in this view, for although there is a trade-off between, say, acceleration and fuel economy at any given point in time, cars have improved dramatically on both dimensions over time. We have expanded the limits of the possible rather than simply accepting historical constraints as inviolable constants.

In other words, where strategy turns on exploiting trade-offs, progress depends on breaking them. How are we to know when and how to do which?

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