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Strategic fit

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strategic fit1
Derek F. Channon and John McGee
Seen from a systems perspective, the task of
management is to keep the organization in a
controlled balance against the multiple and
diverse forces in the broader strategic context.
The term strategic fit (or alignment) is used to
indicate how a strategy needs to be “fitted”
(“aligned”) with its external context and how
the internal organization needs to be properly
meshed (“aligned”) with the strategy. The
strategic fit of strategy with the external context
and of strategy with internal organization is a
prime task of the general management team.
The essential intangible barrier to strategy
imitation is strategic fit. The way in which a
firm’s activities and capabilities fit together
is often achieved by sustained learning (see
ORGANIZATIONAL LEARNING) and experimen-
tation over time and cannot readily be imitated
by would-be followers. For example, all car
assemblers know that BMW produces its cars to
enhance driver appeal, but it is extraordinarily
difficult to replicate the way in which BMW has
learned to fit everything together. Strategic fit is
the classic response to the economic analyst who
says that all profits decay: “yes, maybe – but
look how long it takes.”
Strategic fit occurs usually in related diversi-
fied concerns (see RELATED DIVERSIFICATION) as
a result of superior competitive position arising
from overall lower cost and the successful
transfer of core skills, technology, and manage-
rial know-how between businesses. The earlier
concepts of synergy and shared experience have
similar meanings.
Strategic fit, however, may apply in apparently
unrelated businesses where financial synergy
may be found. For example, a high cash flow
business may financially complement a business
that is a high capital user. Examples of this
phenomenon include Reo Stakis – a combina-
tion of casinos and hotels – the Ladbroke Group
and Donald Trump’s empire, all of which are
engaged in similar sets of activities.
Diversification into businesses in which shared
technology, marketing, and production skills are
required can lead to economies of scope when
the costs of operating two or more businesses are
Wiley Encyclopedia of Management, edited by Professor Sir Cary L Cooper.
Copyright © 2014 John Wiley & Sons, Ltd.
less than operating each individually. The key to
such cost reductions is therefore diversification
into businesses with strategic fit.
Market-related fit occurs when the activity
cost chains of different businesses overlap
such that they attempt to reach the same
consumers via similar distribution channels,
or are marketed and promoted in similar ways.
In addition to such economies of scope, it
may also be possible to transfer selling skills,
promotion and advertising skills, and product
positioning/differentiation skills across busi-
nesses. Care must, however, be taken to ensure
that market-related fit is possible. Successful
examples include Canon’s strategic position in
cameras and photographic equipment being
logically extended into copying and imaging
equipment, and Honda’s position in motor-
cycles being extended into other activities
using engines, including automobiles and
lawnmowers. However, not all such moves are
successful. Thus, British American Tobacco
(BAT) found that selling branded cosmetics was
different than selling branded tobacco items.
Operating fit is achieved where the potential
for cost sharing or skills transfer can occur
in procurement, R&D, production, assembly,
and/or administration. Cost sharing among
these activities can lead to economies of scale.
Again, successes such as the sale of life insur-
ance policies by retail banking branches can
be identified. Similarly, failures are frequently
due to inabilities to insure integration between
activities from different businesses brought
together by acquisition.
Management fit occurs when different
business units enjoy comparable types of
entrepreneurial administrative or operating
problems. This type of gain is very difficult to
achieve due to differences in corporate culture.
Classic failures in achieving such fit gains
occurred in the attempted diversification moves
by the oil industry majors after the first oil price
shock in 1973. Redefinitions of their businesses
into “energy” and “raw materials” encouraged
moves into minerals, coal, and gas. Most of these
moves were serious failures, or the expected
strategic fit did not materialize.
Ironically, the only strategic fit which is almost
certain to be achieved is the financial fit. The
operational strategic fits have lower probabilities
 2 strategic fit
of success, and that for marketing being higher
than that for production, which, in turn, is
higher than that for R&D.
The McKinsey (see MCKINSEY 7S MODEL)
(Waterman, 1982) is a classic example of model
designed to explain and portray internal strategic
fit where the 7Ss represent characteristics of
the organization, namely, strategy, structure,
systems, style, staff, skills, and shared values.
The strategic fit concept has also been criti-
cized as being too static and limiting, focusing
as it does on existing resources and the existing
environment rather than seeking out the future
opportunities and threats which are the focus
of firms with strategic intent. However, lack
of consistency between a firm’s strategy and
its internal and external environments can be
a significant contributor to corporate failure.
For example, expansions into foreign markets
frequently face difficulties because the foreign
market context is different, and therefore a
modified strategic approach is required (e.g.,
Laura Ashley in the US market, Disney with
EuroDisney, and General Motors in Japan all
faced difficulties, see Grant, 2011). Similarly,
failure to match a strategy with resources can
lead to an overstretching of limited resources.
ENDNOTES
1 Original article by Derek F. Channon. Updated
by John McGee.
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