Good companies with bad strategies

Is yours one of them?  A singular focus on shareholder value is the Bermuda Triangle of strategy, according to Michael E Porter, director of Harvard’s Institute for Strategy and Competitiveness, as reported in Management Today, October 2009, pp 38-39:

Michael E Porter is generally recognised as the father of the modern strategy field. When Porter started studying strategy, he believed most strategic errors were caused by external factors, such as consumer trends or technological change. During a recent lecture, Porter stated that he now believes that many, if not most, strategic errors come from within.

["Companies do bad strategy to themselves." This was one of the 'takeaways' from a lecture held at Wharton Business School by Porter titled "Why do good managers set bad strategies?".

Porter also warned that managers get into trouble when they attempt to compete head-on with other companies. No one wins that kind of struggle, he believes.  Instead, managers need to create and develop a clear strategy around their company's unique place in the market.

Bad strategy often stems from the way managers think about competition, Porter noted. Many companies set out to be the best in their industry, and the best in every aspect of business, from marketing to supply chain. The problem with that way of thinking is ...  there is no best company in any industry. "What is the best car?" asks Porter. "It depends on who is using it. It depends on what it's being used for. It depends on the budget."

Managers who think there is one best company and one best set of processes set themselves up for destructive competition. "The worst error is to compete with your competition on the same things," Porter says. "That only leads to escalation, which leads to lower prices or higher costs, unless the competitor is inept. "Companies should strive to be unique, he adds.  Managers should be asking, "how can we deliver a unique value to meet an important set of needs for an important set of customers?"

Flawed strategy definition

Another mistake managers make is relying on a flawed definition of strategy, says Porter. "The word 'Strategy' gets used in so many ways, with so many meanings, that it can end up being meaningless.

"Often corporate executives will confuse strategy with aspiration. For example, a company that proclaims its strategy is to become a technological leader, or to consolidate the industry, has not described a strategy, but a goal.

"Strategy has to do with what will make you unique," Porter notes.

Companies also make the mistake of confusing strategy with an action, such as a merger or outsourcing. "Is that a strategy? No. It doesn't tell what unique position you will occupy."

A company's definition of strategy is important, he says, because it predefined choices that will shape decisions and actions the company takes. Vision statements and mission statements should not be confused with strategy. Companies may spend months negotiating every word, and the results may be valuable as a corporate statement of purpose, but they do not substitute for strategy.

In the past 10 years, Porter adds, companies have become increasingly confused about corporate goals. The only goal that makes sense is for companies to earn a superior return on invested capital as it's the only goal that aligns with economic value. "We have had this horrendous decade where people thought the goal of a company is shareholder value. Shareholder value is a result. Shareholder value comes from creating superior economic performance."

Corporate strategy cannot be done without quantitative analysis, says Porter. "Any good strategy choice makes the connection between the income statement and the balance sheet."

Companies hoping to build a successful strategy need to define the right industry and the right products and services. Bad strategy often flows from a bad definition of the business, says Porter.

Geographic focus is another type of business definition that can trip up strategy. He gives the example of a US lawn-care company that developed a plan to grow through international expansion. But the business wasn't suited to operating globally, with expensive to ship products and the need to deal with different retail channels in different regions.

Operational effectiveness

One more mistake managers make his confusing operational effectiveness with strategy. Operational effectiveness is, in essence, extending best practices. Good operations can drive performance, Porter says, but adds: "the trouble is that it's hard to sustain. If it's a best practice, everybody will do it too."

None of this is easy, he concedes. "The real challenge of management is you have to do these things together at the same time. You have to keep up with best practices while solidifying, clarifying and enhancing your unique positions."]

Porter still rules the debate over strategy, and these days must work even harder to clear the water muddied repeatedly by so many with less clear thinking than his, who have been confusing the concepts and the meanings of important words.

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