Friday, November 03, 2006

Porter: Bermuda Triangle Strategy

Michael Porter recently spoke at Wharton on the topic of "Why do Good Managers set Bad Strategies". In this discussion porter starts out by saying that most strategic errors are not caused by external factors, but come from within. He goes on to discuss what strategy isn't. Here is a particularly good excerpt:

"'Strategy' is a word that gets used in so many ways with so many meanings that" it can end up being meaningless. Often corporate executives will confuse strategy with aspiration. For example, a company that proclaims its strategy is to become a technological leader or to consolidate the industry 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."

In this article he introduces the concept of the Bermuda Triangle of Strategy, which is the confusion over economic value and shareholder performance.

"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."

Some key points I pulled from the remaining discussion:

  • To think that stock price on any one day, or at any one minute, is an accurate reflection of true economic value is dangerous.
  • Corporate strategy cannot be done without strong quantitative analysis.
  • 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.
  • Confusing operational effectiveness with strategy - Good operations can drive good performance, but its hard to sustain. If its a good practice everyone will do it.
  • You have to keep up with best practices while solidifying, clarifying and enhancing your unique positions.
  • Don't let incremental improvements in operations crowd out the larger strategy of building a unique business that will retain its competitive advantage - keep competitive strategy in mind at all times.
  • The key principles of strategic positioning, is a unique value proposition, a tailored value chain, clear trade offs in choosing what not to do, and strategic continuation, or ongoing improvement. The underpinnings of strategy are "activities that fit together and reinvigorate each other.
  • Continuity is critical to successful strategy - If you don't do it often, it's not strategy
    A capital market bias can be a barrier to strategy - when equity compensation is tied to share price people become overly attentive to financial market tactics (eg. mergers, acquisitions), and can make poor decisions.
  • Importance of Leadership on strategy: Strategy is challenged every day, and only a strong leader can remain on course when confronted with well-intentioned ideas that would deviate from the company's strategy.
  • Corp strategy should not be kept a secret. Openness and clarity of strategy will help everyone in the organization understand the strategy and align everything they do with that strategy every day.

The more I read today about capital markets, and the downsides to having to answer to a group of shareholders that often know little to nothing about the business you are in, too focused on short term financial returns, and rapid growth at all costs, bodes with the concept of staying small and agile, to have the 'appropriate mix' of shareholders, who align with your strategy. Small does not mean less profitable in the new economy.

No comments: