The most common strategy mistakes
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RESEARCH & IDEAS The Most Common Strategy Mistakes Published: December 21, 2011 Author: Joan Magretta In a new book, Understanding Michael Porter: The Essential Guide to Competition and Strategy, Joan Magretta distills Porter's core concepts and frameworks into a concise guide for business practitioners. In this excerpt, Porter discusses common strategy mistakes. Key concepts include: • One of the biggest mistakes a manager can make is to assume the best results come from competing to be the best. Competing to be unique is a much more effective strategy. • Other common mistakes include confusing marketing with strategy, overestimating strengths, and misunderstanding the definition of business. • The worst mistake—but the most common one—is not to have a strategy at all. "Michael Porter didn't get to be a giant in the field of competition and strategy by hunting small game." Joan Magretta begins her new book on Harvard Business School's Michael Porter's work by noting that, from the start of his career, Porter has been asking a big question when it comes to understanding everything from the free enterprise system to the individual motivations of managers. Why are some companies more profitable than others? In this excerpt from an interview between Porter and Magretta, Porter discusses the importance of strategy in delivering competitive advantage. Book excerpt from Understanding Michael Porter: The Essential Guide to Competition and Strategy. Joan Magretta: What are the most common strategy mistakes you see? Michael Porter: The granddaddy of all mistakes is competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results. This is a hard race to win. So many managers confuse operational effectiveness with strategy. Another common mistake is confusing marketing with strategy. It's natural for strategy to arise from a focus on customers and their needs. So in many companies, strategy is built around the value proposition, which is the demand side of the equation. But a robust strategy requires a tailored value chain—it's about the supply side as well, the unique configuration of activities that delivers value. Strategy links choices on the demand side with the unique choices about the value chain (the supply side). You can't have competitive advantage without both. "The granddaddy of all mistakes is competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results." Another mistake is to overestimate strengths. There's an inward-looking bias in many organizations. You might perceive customer service as a strong area. So that becomes the "strength" on which you attempt to build a strategy. But a real strength for strategy purposes has to be something the company can do better than any of its rivals. And "better" because you are performing different activities than they perform, because you've chosen a different configuration than they have. Another common mistake is getting the definition of the business wrong, or getting the geographic scope wrong. There has been a tendency to define industries broadly, following the influential work of Theodore Levitt some decades ago. His famous example was railroads that failed to see that they were in the transportation business, and so they missed the threat posed by trucks and airfreight. The problem with defining the business as transportation, however, is that railroads are clearly a distinct industry with distinct economics and a separate value chain. Any sound strategy in railroads must take these differences into account. Defining the industry as transportation can be dangerous if it leads managers to conclude that they need to acquire an airfreight company so they can compete in multiple forms of transportation. Similarly, there has been a tendency to define industries as global when they are national or encompass only groups of neighboring countries. Companies, mindful of the drumbeat about globalization, internationalize without understanding the true economics of their business. The value chain is the principal tool to delineate the geographic boundaries of competition, to determine how local or how global that business is. In a local business, every local area will require a complete and largely separate value chain. At the other extreme, a global industry is one where important activities in the value chain can be shared across all countries. Reflecting on my experience, however, I'd have to say that the worst mistake—and the most common one—is not having a strategy at all. Most executives think they have a strategy when they really don't, at least not a strategy that meets any kind of rigorous, economically grounded definition. Magretta: Why is that? Why do so few companies have really great strategies? What are the biggest obstacles to good strategy? Porter: I used to think that most strategy problems arose from limited or faulty data, or poor analysis of the industry and competitors. To say it differently, I thought the problem was a failure to understand competition. This surely does happen. But the more I have worked in this field, the more I have come to appreciate the more subtle and more pervasive obstacles to clear strategic thinking and how challenging it is for companies to maintain their strategies over time. There are so many barriers that distract, deter, and divert managers from making clear strategic choices. Some of the most significant barriers come from the many hidden biases embedded in internal systems, organizational structures, and decision-making processes. It's often hard, for example, to get the kind of cost information you need to think strategically. Or the company's incentive system rewards the wrong things. Or human nature makes it really hard to make tradeoffs, or to stick with them. COPYRIGHT 2011 PRESIDENT AND FELLOWS OF HARVARD COLLEGE 1
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Transcript of The most common strategy mistakes
RESEARCH & IDEAS
The Most Common StrategyMistakesPublished: December 21, 2011Author: Joan Magretta
In a new book, Understanding MichaelPorter: The Essential Guide to Competition andStrategy, Joan Magretta distills Porter's coreconcepts and frameworks into a concise guidefor business practitioners. In this excerpt,Porter discusses common strategy mistakes.Key concepts include:• One of the biggest mistakes a manager can
make is to assume the best results comefrom competing to be the best. Competing tobe unique is a much more effective strategy.
• Other common mistakes include confusingmarketing with strategy, overestimatingstrengths, and misunderstanding thedefinition of business.
• The worst mistake—but the most commonone—is not to have a strategy at all.
"Michael Porter didn't get to be a giant inthe field of competition and strategy by huntingsmall game."
Joan Magretta begins her new book onHarvard Business School's Michael Porter'swork by noting that, from the start of his career,Porter has been asking a big question when itcomes to understanding everything from thefree enterprise system to the individualmotivations of managers.
Why are some companies more profitablethan others?
In this excerpt from an interview betweenPorter and Magretta, Porter discusses theimportance of strategy in delivering competitiveadvantage.
Book excerpt fromUnderstanding MichaelPorter: The Essential Guideto Competition and Strategy.
Joan Magretta: What are the mostcommon strategy mistakes you see?
Michael Porter: The granddaddy of allmistakes is competing to be the best, goingdown the same path as everybody else andthinking that somehow you can achieve betterresults. This is a hard race to win. So manymanagers confuse operational effectivenesswith strategy. Another common mistake is
confusing marketing with strategy. It's naturalfor strategy to arise from a focus on customersand their needs. So in many companies, strategyis built around the value proposition, which isthe demand side of the equation. But a robuststrategy requires a tailored value chain—it'sabout the supply side as well, the uniqueconfiguration of activities that delivers value.Strategy links choices on the demand side withthe unique choices about the value chain (thesupply side). You can't have competitiveadvantage without both.
"The granddaddy of allmistakes is competing to bethe best, going down thesame path as everybody elseand thinking that somehowyou can achieve betterresults."Another mistake is to overestimate
strengths. There's an inward-looking bias inmany organizations. You might perceivecustomer service as a strong area. So thatbecomes the "strength" on which you attempt tobuild a strategy. But a real strength for strategypurposes has to be something the company cando better than any of its rivals. And "better"because you are performing different activitiesthan they perform, because you've chosen adifferent configuration than they have.
Another common mistake is getting thedefinition of the business wrong, or getting thegeographic scope wrong. There has been atendency to define industries broadly, followingthe influential work of Theodore Levitt somedecades ago. His famous example was railroadsthat failed to see that they were in thetransportation business, and so they missed thethreat posed by trucks and airfreight. Theproblem with defining the business astransportation, however, is that railroads areclearly a distinct industry with distincteconomics and a separate value chain. Anysound strategy in railroads must take thesedifferences into account. Defining the industry
as transportation can be dangerous if it leadsmanagers to conclude that they need to acquirean airfreight company so they can compete inmultiple forms of transportation.
Similarly, there has been a tendency todefine industries as global when they arenational or encompass only groups ofneighboring countries. Companies, mindful ofthe drumbeat about globalization,internationalize without understanding the trueeconomics of their business. The value chain isthe principal tool to delineate the geographicboundaries of competition, to determine howlocal or how global that business is. In a localbusiness, every local area will require acomplete and largely separate value chain. Atthe other extreme, a global industry is onewhere important activities in the value chaincan be shared across all countries.
Reflecting on my experience, however, I'dhave to say that the worst mistake—and themost common one—is not having a strategy atall. Most executives think they have a strategywhen they really don't, at least not a strategythat meets any kind of rigorous, economicallygrounded definition.
Magretta: Why is that? Why do so fewcompanies have really great strategies? Whatare the biggest obstacles to good strategy?
Porter: I used to think that most strategyproblems arose from limited or faulty data, orpoor analysis of the industry and competitors.To say it differently, I thought the problem wasa failure to understand competition. This surelydoes happen. But the more I have worked inthis field, the more I have come to appreciatethe more subtle and more pervasive obstacles toclear strategic thinking and how challenging itis for companies to maintain their strategiesover time.
There are so many barriers that distract,deter, and divert managers from making clearstrategic choices. Some of the most significantbarriers come from the many hidden biasesembedded in internal systems, organizationalstructures, and decision-making processes. It'soften hard, for example, to get the kind of costinformation you need to think strategically. Orthe company's incentive system rewards thewrong things. Or human nature makes it reallyhard to make tradeoffs, or to stick with them.
COPYRIGHT 2011 PRESIDENT AND FELLOWS OF HARVARD COLLEGE 1
The need for trade-offs is a huge barrier. Mostmanagers hate to make trade-offs; they hate toaccept limits. They'd almost always rather try toserve more customers, offer more features.They can't resist believing that this will lead tomore growth and more profit.
I believe that many companies underminetheir own strategies. Nobody does it to them.They do it themselves. Their strategies fail fromwithin.
Then there is the host of strategy killers inthe external environment. These range fromso-called industry experts to regulators andfinancial analysts. These all tend to pushcompanies toward what I call "competition tobe the best"—the analyst who wants everycompany to look like the current marketfavorite, the consultant who helps youbenchmark yourself against everyone else in theindustry, or who pushes the next big thing, suchas the notion that you're supposed to delight andretain every single customer.
Let's take this last idea as an example. If
you listen to every customer and do what theyask you to do, you can't have a strategy. Like somany ideas that get sold to managers, there issome truth to it, but the nuances get lost.Strategy is not about making every customerhappy. When you've got your strategist's hat on,you want to decide which customers and whichneeds you want to meet. As to the othercustomers and the other needs, well, you justhave to get over the fact that you will disappointthem, because that's actually a good thing.
I also believe that as capital markets haveevolved they have become more and more toxicfor strategy. The single-minded pursuit ofshareholder value, measured over the shortterm, has been enormously destructive forstrategy and value creation. Managers arechasing the wrong goal.
These are just some of the obstacles.Cumulatively, they add up. Having a strategy inthe first place is hard. Maintaining a strategy iseven harder.
About the authorJoan Magretta is a Senior Associate at the
Institute for Strategy and Competitiveness atHarvard Business School.
Excerpted with permission of HarvardBusiness Review Press. Copyright © 2012 JoanMagretta. From Understanding Michael Porter:The Essential Guide to Competition andStrategy by Joan Magretta.
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