Michael Porter Asks, and Answers: Why Do Good Managers Set Bad Strategies? – Summary
This article identifies the factors behind the crucial question “Why do good managers come up with bad strategies?” and also highlights self-inflected corporate errors due to a 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 making 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 than 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 management is that companies want to become the 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 a different level of resources, specialties, and mindset. Instead of wasting resources in useless competition with other companies, which only brings them destructive competition, they should strive to be unique.
Strategy
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 for confusion by managers. Strategy is something to deal with to make your company unique, not to make a vision, mission, goal, or action.
The Ultimate Goal of the Corporate
Managers have become confused about achieving the ultimate goal of maximizing the wealth of the shareholders by maximizing profit. Companies’ economic performance and shareholder value maximization become as complicated as the Bermuda Triangle. The finding is that shareholder value is the result of superior economic performance.
Performance Indicators
How could the value of the company go down & up on the same day? Comparing share price with company performance is not a 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 the company’s finance statements and ultimately the share price.
Right Industry, Right Product
Companies may result in a 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.
The location of the companies also plays a vital role in successful strategy. Unsuitable conditions may create unnecessary time and cost effects.
Operational Effectiveness
Another problem is that everyone starts following if anyone has the best operational practices. The crust is managers should focus simultaneously on best operational practices and enhancing unique positions. The biggest challenge is, that none of these is easy, and managers have to maintain a competitive strategy in their minds rather than 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
Continuity is something that is unavoidable. Strategies can only work in the true sense when it is in continuity. Many companies end up failing only because they do not focus on continuing their strategy even though they have a great successful start.
Dividends
This is also the best way to avoid pressure to boost share prices while achieving rapid growth. On the one hand, dividend returns gain capital to long-term investors and on the other hand, short-term investors get an advantage due to changes in share price.
Star Performer
In every industry, there is some best recognized company which creates pressure in the industry so that other companies follow the leader of the industry. This game plan is to keep other companies engaging to follow you and not let them focus on their own unique strategies.
Barriers to Strategy
Analysts proved that all corporate scandals have resulted from silly mistakes or decisions made by managers due to pressure to grow fast and maximize shareholder wealth. This also leads to choosing irrelevant metrics that are not truly aligned 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 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 the best communication skills.
Conclusion
Companies can fail despite strong leadership with perfect strategies and best operational practices if top-to-bottom employees are not well aligned with clarity and openness. As time has changed, our practices should also need to be changed. There are no more secrets from competitors or within companies.