Michael Porter Asks, and Answers: Why Do Good Managers Set Bad Strategies? – Summary
This article identifies the factors behind the crucial question that “Why do good managers come up with bad strategies?” and also highlights self-inflected corporate’s errors due to singular focus on maximization of shareholder value. This article is based on the questions and answers by Michael E. Porter, director of Harvard’s Institute for Strategy and Competitiveness.
Porter emphasized that the fact behind good managers make bad strategies is when they start competing head-on with other companies despite focusing on their own unique position in the market. He realized that most strategic errors come from inside the company rather external factors.
He further elaborated his findings through three sub-headings:
- Destructive Competition
- Right Time, Right Place
- Leadership and Strategy
Best Company in the Industry
The biggest problem with the management is that companies want to become best in the industry in all aspects like marketing, supply chain, production etc. without realizing that there is no best company in any industry. Rather they should focus on satisfying their important bunch of customers with their unique set of resources. Every single company has different level of resources, specialties, and mindset. Instead of wasting resources in useless competition with other companies, which only bring them on destructive competition, they should strive to be unique.
Another most important commonly made mistake is the misunderstanding of the word “Strategy”. Although the word strategy can be used in many ways and has many meanings, and might be this is the reason of confusion by managers. Strategy is something to deal to make your company unique, not to make vision, mission, goal or an action.
The Ultimate Goal of the Corporate
Managers have become confused to achieve ultimate goal to maximize the wealth of the shareholders by maximizing profit. Companies’ economic performance and shareholder value maximization become as complicated as Bermuda Triangle. The finding is that shareholder value is the result of superior economic performance.
How could be a value of the company can go down & up on a same day? Comparing share price with company performance is not true indicator at the end of the day. The goal of the company shall be to increase the economic performance of the company which would be reflected in company’s finance statements and ultimately the share price.
Right Industry, Right Product
Companies may result with fail strategy if they do not understand the right definition of the particular business. Focusing on the two different sectors may lead to unsuccessful projects.
Location of the companies also play vital role towards successful strategy. Unsuitable conditions may create unnecessary time and cost effect.
Another problem is that everyone starts following if anyone has best operational practices. The crust is managers should focus simultaneously on best operational practices and enhancing unique positions. The biggest challenge is, none of these is easy, and managers have to maintain competitive strategy in their mind rather only focusing on incremental operational improvement. Managers should have cluster clear picture in front of them such as every meeting & every decision.
The key strategic principles identified by Porters are:
- A Unique Value Proposition
- A Tailored Value Chain
- Clear Trade-off (In choosing what not to do)
- Strategic Continuation / On Going Improvements
Continuity is something which is unavoidable. Strategies can only work in true sense when it is in continuity. Many companies end up with failure only because they do not focus to continue their strategy even they have great successful start.
This is also best way to avoid pressure to boost share price while achieving rapid growth. On the one hand, dividends returns gain on capital to long-term investors and on the other hand, short-term investors get advantage due to change in share price.
In every industry, there is some best recognized company which creates pressure in industry so that other companies follow the leader of the industry. This game-plan is to keep other companies engaging to follow you and do not let them focus on their own unique strategies.
Barriers to Strategy
Analysts proved that all corporate scandals were resulted of silly mistakes or decisions made by managers due to pressure to grow fast and maximize shareholder wealth. This also leads to choose irrelevant metrics which are not truly align with specific strategies. Other barriers include:
- Industry Conventional Wisdom
- Labor Regulations / Agreements
- Inappropriate Cost Allocation
- Rapid Turnover of Leadership
Leadership and Team Coordination
Strategies evolve around the leadership. All successful companies have strong leadership. According to Porter, a leader is someone who is not afraid:
- To lead
- To make choices
- To make decisions
A leader should also have a lot of confidence & conviction and best communication skills.
Companies can be failed besides a strong leadership with perfect strategies and best operational practices if top to bottom employees are not well align together with clarity and openness. As time has changed, so our practices should also need to be changed. There are no more secrets from competitors or within companies.