Michael Porter discussed the barriers to developing effective strategies with Joan Margretta who recently published the book, Understanding Michael Porter: The Essential Guide to Competition and Strategy in the Dec 21, 2011 issue of Working Knowledge.
After not having a strategy, seeking to be the best in an industry is the next most common mistake companies make, posits 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."
Many internal and external forces push organizations to adopt this strategy. Executives do not assess theirs strengths, their target markets, and their competition correctly. They tend to ignore their biases and the behavior created by internal reward and/or cost systems that may be counterproductive. Managers, says Porter, also hate to make trade-offs because they dislike accepting that they and their firms have limits.
External forces pushing companies to adopt the best strategy include security analysts and consultants who push customer-centric strategies. But, as Porter points out, “If you listen to every customer and do what they ask you to do, you can't have a strategy. Like so many ideas that get sold to managers, there is some truth to it, but the nuances get lost. Strategy is not about making every customer happy. When you've got your strategist's hat on, you want to decide which customers and which needs you want to meet. As to the other customers and the other needs, well, you just have to get over the fact that you will disappoint them, because that's actually a good thing.”
Organizations expanded their definition of their industries based on the work of Theodore Leavitt, losing their ability to place their company in the correct sub-segment. A famous example is the railroad company which should have realized that it was in the transportation business to compete effectively against long-distance trucking and airfreight. But railroads have a unique position in the transportation business which must be considered when developing a strategy. Porter adds, “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.”
Other common mistakes are confusing marketing or operational effectiveness 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.”
How does your firm define its strategy vs. your competition? If multiple companies are seeking to be the best in an industry, they are essentially chasing the same target customers who can then demand price concessions. With this dynamic, some market segments are ill-served and overall profitability of the industry is lower than it would be if organizations had each selected a unique value proposition.
Is this dynamic operating in your industry currently? If so, what can you do to push your management to refine its strategy to be unique? You could:
- Write an analysis of the competitors’ strategies to show the similarities among them and to your organization’s plans
- Suggest a war gaming or scenario planning exercise to allow the executives to realize the issues themselves
- Interview customers, and non-customers if possible, to solicit their views of the various competitors striving to be the best—customer comments usually carry more weight than employee views
You may be able to think of more ways to focus attention on this issue. The important point is to have the issue examined to help your firm succeed and, of course, keep you employed.