How to Make a Good Strategic Decision (Cont’d)

A fundamental mistake business leaders commonly make is the approach (or, analytical framework, if you prefer) they use to make strategic decisions. If you use the wrong approach, then you’re less likely to make the best decision possible under the circumstances. This was the subject of last week’s newsletter.

But we didn’t finish the story last week. That is, we didn’t address a correct path for making strategic decisions. We do that here.

What is strategy in the business sense?

To answer this question, we turn to Michael Porter, widely regarded as the ‘father’ of modern business strategy. Among many other concepts, he laid out a blueprint for understanding strategy in his Harvard Business Review article ‘What is Strategy?’ Decades later, senior consultants continue to cite it as a foundational guide for business strategy.

Strategy, according to Porter, is not about operational efficiency.

Being “efficient,” “lean,” or following “best practice” are all words you’ve probably heard before in corporate speak. That’s because managers in most businesses are highly committed to driving operational excellence.

Few businesses, however, have consistently competed successfully on operational effectiveness alone over a long period. Competitors will always be there to imitate and improve on your techniques. Over time, it causes everyone to adopt the same practices, which leads to competitive convergence. There’s a reason, after all, why Burger King, McDonald’s, and other fast food hamburger restaurants don’t look all that different from each other.

Real competitive strategy instead comes from doing things differently from your business rivals.

This brings us to the first step of making a strategic decision…

Step One: Take a unique position.

This means either performing different activities from your competitors or performing similar activities differently.

It’s the strategic equivalent of saying “We’re not like other companies.” Think: Trader Joe’s (this is a great podcast that explores how Trader Joe’s does this).

Fortune favors the bold, and taking a bold strategic position is one of the key drivers that enable companies to outpace the market.

McKinsey’s analysis of ‘Strategy Champions’ (the rare companies that have successfully moved from the middle to the top quintile in economic profit) found that these companies particularly distinguished themselves with bold strategic moves.

Southwest Airlines, for example, differentiated itself in its early days by offering low-cost, short-haul flights between midsize cities and secondary airports. It avoided large airports and flying long distances. Unlike other major airlines that offered comfort fare classes, Southwest’s low-cost options enabled it to perform fast turnarounds at the gates, allowing its planes to fly for longer and more frequently. Until the pandemic hit, Southwest had been the US’s most consistently profitable airline, reporting 47 consecutive years of profitability.

On the flip side, companies that weaken their unique positions tend to lose out against competitors.

In recent years, Southwest Airlines has lost much of the differentiation that once defined its brand. After suffering through a few poor years during the pandemic and a software meltdown that caused a $1 billion loss in 2022, a hedge fund acquired a sizable stake in the company in 2024. Soon after, the pressure began to mount for Southwest to boost its short-term profits.

This has resulted in aggressive cuts to many of its no-frills features, a move that has sparked widespread customer outrage. Gone is its beloved ‘Bags Fly Free’ policy, and next month, its open seating policy is also ending. In other words, Southwest is starting to look a lot like every other major airline.

Southwest’s recent Q3 earnings report came in higher than expected, but it’s no longer playing on the field it created. Instead, it’s choosing to take on much larger competitors at their own game, abandoning a de facto moat that served it so well in the past.

Category pioneers rarely prosper when they abandon the rules they wrote and volunteer to play by someone else’s. You’ll find plenty of examples among companies that haven’t stood the test of time:

• Sears: Initially built dominance on logistics efficiency and private labels, Sears was the “Amazon of its day.” The company then tried to compete with Walmart on price and with specialty retailers on experience…and lost both battles.
• BlackBerry: Once dominated the early smartphone market with secure, keyboard-first devices that suited business users. But as the market shifted to touchscreens, BlackBerry gave up its niche to follow Apple and Android’s lead, losing its core customers by not establishing a new source of differentiation.
• Gap: The brand once defined accessible, classic American apparel. It then tried to compete simultaneously with fast fashion (Zara/H&M) and premium lifestyle brands. The result is that Gap now suffers from a lack of identity in an increasingly crowded retail space.

Step Two: Make a trade-off.

Trade-offs are the very essence of strategy, according to Porter, and making a strategic decision is fundamentally about choosing what not to do. This means choosing to compete in one way over another (the Old El Paso ad notwithstanding, you often can’t have it both ways).

You can see this with even the largest, richest companies. Look at Meta. It’s cutting resources allocated to building the ‘metaverse,’ once framed by Mark Zuckerberg as the future of the company and the very reason behind changing its name from Facebook, in order to allocate more capital to investing in AI.

Step Three: Plan out the ‘How.’

Strategy is one thing. Tactics are another. Tactics are the methods you use to execute a strategy. This is where many strategies quietly fall apart.

According to McKinsey, the biggest factor that sets the ‘Strategy Champions’ apart is in the mobilization phase, when a strategic decision is translated into organizational readiness.

These companies pull away from the rest of the field by:

• Turning a strategy into granular initiatives.
• Effectively reallocating resources (budgets and people) to support the strategy.

Essentially, having an ambitious strategy doesn’t mean anything unless you have the structures in place to implement it. We’re seeing this play out in real-time with companies that are in the process of rapidly adopting AI.

In 2024, G&P Global found that 42% of the companies surveyed had abandoned most of their AI pilot projects, up from 17% in 2023. Those with high failure rates in AI adoption had faced resistance from employees and customers. In contrast, those with lower failure rates had taken a holistic approach to project prioritization and had a better grasp of the security, bias, and data privacy challenges when choosing their projects.

In short, even the best strategy fails if the organization isn’t built to carry it across the finish line.

Decisions, decisions.

No one sets out to make the wrong decision.

The steps we’ve broken down here, taken largely from Michael Porter’s playbook, might seem straightforward, but in real life, they’re anything but. That’s why CEOs are paid the big bucks to take on the risk of making the tough calls for their organizations.

What really sets apart the best strategic decision-makers is their boldness in choosing a direction, saying no to distractions, and mobilizing people to make it real.

©2025. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.

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