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Diamonds Are Forever, but Trade-Offs Aren't!

Written by: Nicolas Colin | TheFamily

Trade-offs are a critical milestone on the path to strategic positioning.

They are a lesson that tech Entrepreneurs usually learn: as a startup, it matters less what you do and more what you don’t do. I can vouch that the best tech Entrepreneurs (at least in TheFamily) are trained to make trade-offs from Day One, and they hold onto this as a virtue as their companies scale up.

However, trade-offs tend to evolve as technology progresses and techno-economic paradigms shift. Some trade-offs exist in a certain moment, and then disappear the next. If strategy is the art of embracing constraints, it should take into account the fact that the set of constraints evolves with technology. Michael Porter points out that “what were once believed to be real trade-offs — between defects and costs, for example — turned out to be illusions created by poor operational effectiveness.” In the automobile industry, for example, Japanese car manufacturers broke that constraint through operational innovation and forced a realignment of the industry as a whole.

Likewise, in the digital economy many Fordist trade-offs have become illusions that remain only because Fordist companies driven by economies of scale refuse to seize the opportunities brought about by technology. But they effectively cease to exist as soon as a given company converts to the game of maximizing increasing returns. Suddenly you don’t need to make certain trade-offs; on the contrary, you must try to have it all (because ultimately one of your competitors will do just that and then proceed to smash you into pieces).

One trade-off that doesn’t exist anymore is that between quality and scale. Increasing returns, the new strategic goal in the digital economy, are key here. Once you generate them, the more you grow, and the easier it is to provide high quality. There’s a great Babak Nivi quote about that:

“In the past, scale (low cost, high distribution) was so difficult that organizations with bad products and great scale could win. And it was so difficult to scale the very best products that they never left the boutique.”

“The challenges of scale are now diminishing rapidly. Scale is now available as a service — see Foxconn (manufacturing), AWS (hosting) or Facebook Platform (distribution).”

[In any case,] “if you don’t scale quality, you will be shut out of the marketplace.”

Another obsolete trade-off is that between growth and profitability. Traditional strategic positioning sees an adversarial relationship with growth, as we’re reminded when reading Michael Porter:

“Too often, efforts to grow blur uniqueness, create compromises, reduce fit, and ultimately undermine competitive advantage. In fact, the growth imperative is hazardous to strategy.”

But now in fact, the magic with increasing returns is that it is possible for large companies to sustain growth and profitability simultaneously. Growth is just a byproduct of increasing returns after all, not a goal in itself. If strategic positioning is now about increasing returns, then growth is not the enemy of profitability: quite the contrary, growth is now correlated with profitability, as opposed to what existed in the Fordist economy. As suggested by this McKinsey paper , growth is even the best moat you can dig in a digital economy that’s becoming more competitive every day.

For executives, this is a revolution. With increasing returns now synonymous with long-term returns on invested capital, they have to unlearn many lessons that were taught until recently:

  • too often trade-offs are bad excuses for doing nothing: a goal of strategic management is to challenge them given the current state of technology;
  • it has become critical to pursue quality and scale simultaneously: this is the core know-how of Entrepreneurs, whom every company now needs to attract;
  • growth is not the enemy of profitability; on the contrary, it reveals increasing returns at scale, which is key for long-term success in an economy driven by software.