The Bermuda Triangle of Strategies
Michael Porter asks, and answers: Why do good managers set bad strategies?
From 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. Porter stressed that managers get into trouble when they attempt to 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 began studying strategy, he believed most strategic errors were caused by external factors, such as consumer trends. “But I have come to the realisation after 25 to 30 years that many, if not most, strategic errors come from within. The company does it to itself.”

Destructive Competition
Bad strategy often stems from how 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. The problem with that way of thinking is 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’s 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 only leads to escalation, which leads to lower prices or higher costs unless the competitor is inept.” Companies should strive to be unique. 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. Often corporate executives will confuse strategy with aspiration. For example, a company that proclaims its strategy is to become a technological leader has not described a strategy, but a goal. “Strategy has to do with what will make you unique,” Porter noted. 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 said, because it predefines choices that will shape decisions and actions the company takes. Vision and mission statements should not be confused with 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 with economic value.

Porter said the “Bermuda Triangle of strategy” is confusion over economic performance and shareholder 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.”

Principles of Strategic Positioning
Porter went on to describe key principles of strategic positioning, including a unique value proposition, a tailored value chain, clear tradeoffs in choosing what not to do and strategic continuation.

To start, 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, said Porter.

He pointed to Sysco Corp., the No.1 food service supplier in North America. Defining Sysco simply as a food-distribution firm would eventually lead to a failed strategy.

The industry actually comprises two distinct sectors. One delivers food to small institutions that need help with finance and product selection. The other has large, fast-food franchise customers, like McDonald’s, that are not interested in any additional services. McDonald’s just wants industrial-size containers delivered on time at the best price. Sysco has developed two separate strategies for its two customers.

Geographic focus is another type of business definition that can trip up strategy. He gave the example of a US lawn-care company that developed a plan to grow through international expansion. The business, however, was not suited to operating on a global scale. The products were expensive to ship, and the company had to deal with different retail channels in different regions.

One more mistake managers make is confusing operational effectiveness with strategy. Operational effectiveness is, in essence, extending best practices. Good operations can drive performance, Porter said, but added: “The trouble with that is it’s hard to sustain. If it’s a best practice, everybody will do it, too.”

None of this is easy, he conceded. “The real challenge of management is you have to keep up with best practices while solidifying, clarifying and enhancing your unique positions.”

Managers often tend to let incremental improvements in operations crowd out the larger strategy of building a unique business that will retain its competitive advantage, Porter noted. To bypass this problem, managers must keep the competitive strategy in mind at all times. “Every day, every meeting, every decision, has to be clear.... Is this an operational best practice or is this something that’s improving on my strategic distinction?”

(Distributed by The New York Times Syndicate.)

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