Why Do Good Managers Set Bad Strategies?

Peter JonesInnovation

An interesting confessional from the master of corporate strategy, the Five Forces guru Dr. Michael Porter.

“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. During his remarks, 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.”

This is a significant change, if it makes a difference. Regardless of the different approaches to strategy, planning, and market development, the non-academic practice of strategy has grown up around Porter’s 1980’s work, which was an is hugely influential. The industry analysis, dominate your sector-based mindset that evolved under Five Forces grew into a set of practices that prevented managers from thinking creatively about internal resource development and product innovation. As long as large companies performed well and made money, and shareholders stayed on the train, there was no perceived need to reinvent strategy itself.

“When Porter started out studying strategy, he believed most strategic errors were caused by external factors, such as consumer trends or technological change. “But I have come to the realization after 25 to 30 years that many, if not most, strategic errors come from within. The company does it to itself.”

Innovation and knowledge-leverage strategies require developing a strong internal focus, according to the Penrose (1959) school of resource-based perspective, an empirical approach that enhances organizational capacities and learning, as opposed to theoretical market forces that are always imperfectly understood. A market must be understood, of course, but the strategic basis for action should be based on resources and practices that are unique and non-transferable or imitable.

How does the Penrose RBV orientation apply to design and innovation? Knowledge management scholars such as (Zack and yes, Jones) have argued that the development of knowledge practices is the primary source of innovation and competitive advantage. Product/service design and innovation are not measured by shareholder value – and we should not be led by outdated views of business strategy into taking guidance from such a singular corporate metric. Shareholder value leads to short-term thinking, which constrains innovation to the immediately doable. As a strategy, it puts the future of the firm in the hands of Wall Street investors, which is no strategy for success at all.