Michael Porter Asks, and Answers: Why Do Good Managers Set Bad Strategies?: Knowledge@Wharton (http://knowledge.wharton.upenn.edu/article.cfm?articleid=1594)
Michael Porter Asks, and Answers: Why Do Good Managers Set Bad Strategies?
Published : November 01, 2006 in Knowledge@Wharton
Errors in corporate strategy are often self-inflicted, and 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. These were two of the takeaways from a recent talk by Porter -- titled "Why Do Good Managers Set Bad Strategies?" -- offered as part of Wharton's SEI Center Distinguished Lecture Series. During his remarks, Porter stressed that managers get into trouble when they attemptto compete head-on with other companies. No one wins that kind of struggle, he said. Instead, managers need to develop a clear strategy around their company's unique place in the market. When Porter started out studying strategy, he believed most strategic errors were caused by external factors, such as consumer trends or technological change. "But I have come to the realization after 25 to 30years that many, if not most, strategic errors come from within. The company does it to itself." Destructive Competition Bad strategy often stems from the way managers think about competition, he noted. Many companies set out to be the best in their industry, and then the best in every aspect of business, from marketing to supply chain to product development. The problem with that way of thinkingis there is no best company in any industry. "What is the best car?" he asked. "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 said. "That onlyleads to escalation, which leads to lower prices or higher costs unless the competitor is inept." Companies should strive to be unique, he added. Managers should be asking, "How can you deliver a unique value to meet an important set of needs for an important set of customers?" Another mistake managers make is relying on a flawed definition of strategy, said Porter. "'Strategy' is a word that getsused 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 noted. Companies also make themistake 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 said, because it predefines choices that will shape decisions and actions the company takes. Vision statements and mission statements should not be confused with strategy. Companies mayspend 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 last 10 years or so, Porter added, 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 because that is the only goal that aligns witheconomic value. Recently, companies have developed "flaky metrics of profitability," he said, pointing to amortization of
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