21 Dec 2011  Research & Ideas

The Most Common Strategy Mistakes

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. The need for trade-offs is a huge barrier. Most managers hate to make trade-offs; they hate to accept limits. They'd almost always rather try to serve more customers, offer more features. They can't resist believing that this will lead to more growth and more profit.

I believe that many companies undermine their own strategies. Nobody does it to them. They do it themselves. Their strategies fail from within.

Then there is the host of strategy killers in the external environment. These range from so-called industry experts to regulators and financial analysts. These all tend to push companies toward what I call "competition to be the best"—the analyst who wants every company to look like the current market favorite, the consultant who helps you benchmark yourself against everyone else in the industry, or who pushes the next big thing, such as the notion that you're supposed to delight and retain every single customer.

Let's take this last idea as an example. 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.

I also believe that as capital markets have evolved they have become more and more toxic for strategy. The single-minded pursuit of shareholder value, measured over the short term, has been enormously destructive for strategy and value creation. Managers are chasing the wrong goal.

These are just some of the obstacles. Cumulatively, they add up. Having a strategy in the first place is hard. Maintaining a strategy is even harder.

About the author

Joan Magretta is a Senior Associate at the Institute for Strategy and Competitiveness at Harvard Business School.

Excerpted with permission of Harvard Business Review Press. Copyright 2012 Joan Magretta. From Understanding Michael Porter: The Essential Guide to Competition and Strategy by Joan Magretta.

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Comments

    • John Keck
    • Billing Mgr, Connectria Corp

    Excellent article. Well written and on point. The take away from this is too many managers confuse strategy with tactics, and quite often become bogged down trying to implement one or the other because they don't understand that they are different animals.

     
     
     
    • Anonymous

    Strategy in a startup is often poorly defined. Initially in startups there should be a focus on staying alive long enough to succeed, not to make decisions about too wide a market entry or providing too elaborate an initial product. You cannot respond to every need expressed by every potential customer; just listen to enough of them to sell a product that keeps you going.

     
     
     
    • Tim Gieseke
    • President, Ag Resource Strategies, LLC

    Very nice interview. I like the closing comment that addressed the single-minded pursuit of shareholder value [income]. "Enormously destructive" is pretty strong language to describe the effect of this strategy. I would guess that the corporate culture supports the individual that has this enormously destructive behavior, otherwise this externality would find a home. Without changing this culture or support, I would not expect that any other strategy listed could be long-term. I would like to provide an "ecological equivalent" to this economic dilemna to give it some context, but I would guess that earth resolved that issue long ago.

     
     
     
    • Anonymous

    This is a great article.

    The last part of the article remind me a conference that I attended few years ago and the Dr. said to the audience that "the customers don't have the reason".... (then the audience began to whisper about it), and he repeated... customers don't have the reason, they have the money, and you want that money!!!...

    Most of us have many customers and if you ask every customer about their needs, for sure you will find that they have some different needs and you can not satisfy all...

    You better make a strategy, prioritizing... or the most profitable and/or the things that give you a diferentiation, and/or things that keeps you in the market and/or the things that give you more market share, whatever your focus is at that specific point of the analysis (prioritize).

    But don't forget to get that money!.

     
     
     
    • Janaki Chaudhry
    • Head - Strategy and Business Development, Tata International

    Great article. I love the part that captures the fact that very often internal systems are the biggest barriers to formulating and executing strategy. Practitioners often focus too much on the formulation and underestimate the barriers to be overcome for implementation.

     
     
     
    • Sizelmar P R Jr.
    • Controller, Beraca

    Going straight to the point! This article remember us the basic points to avoid the more common planning mistakes. Excellent.

     
     
     
    • Anonymous

    Sometimes, just sticking to your strategy while the ecosystem around you changes, is bad strategy. Case in Point: RIM. They truly stuck to their strategy to create BBs to serve their corporate customers. Well, see where they are now. The environment has changed from when they designed their first corporate messenger in 1997, but the BB maker, still wants to cater to that segment with their very own value chain. Will it last? almost everyone doubts it.

     
     
     
    • Chidi Nwankpa
    • Snr. Agency Manager, Niger Insurance Plc.

    Great article! Any organization that attempts to satisfy every customer or any manager that tend to accept and implement every advice from everyone can never be unique. Here, I think uniqueness is actually the key to sustainable strategy!

     
     
     
    • Felix P. Nater
    • President, Nater Associates, Ltd.

    Just reading the excerpt provided me a pertinent analysis into my own successes and failures along the way. While I don't disagree with the client, I am very careful not to show any visual or verbal signs of disagreement until I've had the opportunity to assess & evaluate what the client thinks they want. Then and only then do I introduce alternatives that fit within their needs. My strategy helps the client resolve disappointment during the presentation of alternatives during the meeting engagement. The client may not always be right but they're entitled to receive a level of service approximate to their expectations. Where can I find the book?

     
     
     
    • Khaled Al Safi
    • Chief Operating Officer (COO), Abu Dhabi National Exhibitions Company

    Excellent views on the need of robust strategy linking demand and supply side of the equation through tailored made value chain, which is a fundamental reason of misalignment in organization. Unfortunately we tend to fail in identifying properly primary work activities and continue forgetting why we exist as organizations. However, this is not due to lack of knowledge, it is rather due to internal influences and obstacles making us biased not to change it, hence we live with it and continue on dilemma of articulating our strategies with distracted views.

     
     
     
    • Hugo Rodriguez

    Excellent article. Very clear, concise and provocative. When I reflect remembering examples of big mistakes or failures, the trade-offs issue is there and, many times, combined with inefficient incentive systems.

     
     
     
    • Anonymous

    I very strongly agree with Professor Porter. I've been in the leadership business, public and private sector, for over forty years, and he is right on. Far too many leaders spend one or two days a year on strategy and then put it on the shelf and allow themselves to be driven by the importunities of the daily rush. I personally have seen senior executives develop and list of dozens of strengths on which to base a strategy -- DOZENS!!! As with most problems experienced by companies, this is the result of a failure of leadership. The Captain of the ship is responsible for everything about his ship, but he is never the helmsman and seldom the Officer of the Deck. Perhaps this is an analogy that should be explored.

     
     
     
    • Dwight Stickler

    I am nearly in love with this idea that internalized processes can inhibit strategic thinking and execution. In at least one of the companies I have worked with, this process became so inhibitive that it created an inability to even see any damage. It required a sacrificial loss, (the company's loss of my services) to help shake management from their singular pursuit of sales at any cost. I did not return anytime after my departure to check the status of this company's well-being, although it is still in operation. Only under different name.

     
     
     
    • Anshul
    • Marketing Manager, Maruti Realty

    Amazing article. Couldnt agree more that in most instances, managers think they have a strategy rather than truly having one. What they have is short term/ task based 'plans' to handle the situations. I have observed this most commonly with growing SMEs (in Asia), where they do not know from where to start (internal barriers to strategy development).

     
     
     
    • Anonymous

    This article contains most of the common mistakes or confusion regarding the strategy making, implementing and maintaining a strategy. So many managers are bogged down with the excessive data analysis which distracts the managers from the actual reality of events.

     
     
     
    • Anonymous

    Thought provoking - too many organisations over estimate the strength and capability of their internal resources to implement a strategy and then change the strategy at the first major hurdle. Leadership and effective communication are crucial in turning strategy into reality.

     
     
     
    • Praveen Zala
    • PM, Hewlett Packard

    This is an interesting excerpt that I came by while I am reading "Fooled by Randomness" by Nassim Nicholas Taleb.

    My instant reaction for the question - Why are some companies more profitable than others? would have been - the companies are 'plain-lucky'.

    But, if one were to probe for rational reasons - It would rather emerge that the Companies executed Strategies around what Porter's Framework suggests! So, in essence - it does make sense( in a way) to find out from this publication from Joan Magretta - as to what not to do - or what to avoid! This is exactly the knowledge that would allow companies define their strategies a little faster, having validated that they have not had the common pitfalls!

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Strategy is the blueprint for decision making to achieve the objectives of the business entity. In absence of a well framed srtategy, reaching the goal is by hit and try. There is no indepth analysis of all factors and hence the goal is often missed. Flukes may work once a while but not always. Yes, strategy may require course corrections but this would only be possible if a clear-cut strategy exists. Michael Porter has explained crisply what strategy is and what it is not. It is a bounden responsibility of the Board of Directors to finalise strategy and give appropriate directions; also continuously monitor how things are shaping; suggesting and getting implemented remedial measures is then possible. I totally agree that a strategy of whatever standard/quality must be devised as absence thereof is, to say the least, suicidal.

     
     
     
    • Abdulhadi Yau
    • Regional Manager N/W1, Keystone Bank Limited

    I think we have witnessed some of these strategic mistakes in the Nigerian banking industry during the last 5 years. Grandiose ideas of being the best and fast has led to recklessness and loss of focus. Defining the firm as global, when in fact it was regional at best, led to adoption of the wrong tactics with disastrous consequences. This is an excellent article and business leaders will do well to take heed of it's lessons.

     
     
     
    • Dr. Slobodan Adzic
    • Docent, Faculty of Management F@M, Serbia

    Just brilliant. I enjoyed every single word from Porter. A pure essence of strategy in just a few words.

     
     
     
    • Anonymous

    "Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat." - Sun Tzu

     
     
     
    • Anonymous

    Great article. Definitely agree with the point...'having a strategy is hard, maintaining one is even harder'.Being the director of a private limited company & having made a strategy, we do find ourselves almost always giving up on maintaining it. Its so difficult to get over the fact that we will be disappointing a few customers. The feeling that the business may go down, is too high. On the contrary, we are seeing growth and rise in margins.

     
     
     
    • Trish
    • MBA student

    Great interview. I never tire of reading about Porter or his work. Couldn't agree more on the incidence of internal barriers and organisational structures in creating strategic direction for the firm. One is left with lip service, and a nice vision , mission statement.

     
     
     
    • Ravindra Edirisooriya
    • P/T Accountant, Midwestern Small Business

    I took Strategic Management for my accounting and finance /economics degrees before graduating (December 2011) from Missouri Southern State University. We studied some of Professor Porter's classic strategic management concepts (among others) and we appreciated every bit of it. We did a simulation of sensor industry (four class teams and two "computer" teams) as part of the coursework. Also, I tried my hand in two startup business ventures and the first lead me (one of the reasons) to business school (and allowed me to comfortably finish business school without doing a "Bread and Butter" job) and the second gave me some valuable real world international business experience. Currently, I am planning my third start up business venture and I am assisting a small business to overcome a scaling problem besides working as its part-time accountant.

    Yale cold-war history professor recently defined strategy as a relationship and the dictionary defines it as a (military) plan to achieve an objective. The textbook (Gamble) definition of a company's business strategy is "the combination of competitive moves and business approaches that managers employ to please customers, compete successfully, conduct operations, and achieve organizational objectives."

    Some other common strategy mistakes: one or two large customers and they dictate terms or their failure could affect your business, ethically irresponsible business partners, lack of control of your business (how much to delegate and how much to retain), sticking to the same old strategy too long when the world (external environment) has changed (like most of our politicians, Swiss watch makers is another example) or management failure to unlearn an old strategy fast enough to accommodate (meaningful change) a new strategy based on new information, and not thinking of employee delight (which makes employees passionate about their jobs) along with customer delight.

     
     
     
    • Dan Thomas
    • President, Focus, Inc.

    The discussion in this excerpt/interview of the railroads and the way that Theodore Leavitt's article "Marketing Myopia" caused extensive confusion is very similar to the one in my 1993 book, Business Sense (see Chapter 2: "What Is a Business?"). Great minds must run in similar "tracks."

    Transportation is not a "business." It is a sector of the economy in which we can find several industries and many, many businesses.

    The most common mistake in Strategic Management is getting the definition of the business wrong. Unfortunately, if you get that wrong, all the steps in the process that follow will fall short, at best.

    Dan Thomas

     
     
     
    • Rod Rodriguez
    • Associate, C3TS Consulting

    Very useful insights into corporate behavior and modus operandi. My entire career has been in the engineering design and consulting field, a rather unique sector of the economy, with quite different drivers and motivations than most other industries. We serve several different sectors of industry as clients -- from private to public -- and so with that come differing strategies that are at play at the same time. As those industries change and evolve, so must our strategies in terms of marketing to and serving these clients. Large and small engineering firms cope better than medium firms. The large firms are able to dedicate resources specifically oriented to the different sectors, while small firms tend to concentrate on fewer clients in the same sector. Mid-sized firms, however, often have the same managers wear a myriad of hats, typically in the same day! And, oh, engineers are perfectionists, so we all try to be the best. ..at everything we do. (Strategy No. 1.1: Perfection is its own reward. No. 1.2: Obtain client satisfaction on every job.) And that's the extent of our strategic thinking. Thank you for putting up a mirror to our faces.

     
     
     
    • Andrea Marcosignori

    Excellent article.

    Making strategy means deciding what to do, maintaining the humility to effectively assess situations, strengths and weaknesses. Ultimately, we need to cultivate a human virtue, so that ethics comes into play.

    Best regards

    Andrea Marcosignori

     
     
     
    • Judith King-Murray

    I strongly believe that the #1 impediment to strategic change in an existing organization is underestimating the power of an organization's culture. I have seen it happen many times -- a great idea, a great plan, and not enough attention to internal adoption.

     
     
     
    • Stephen Kepher
    • Development Professional

    Outstanding article. I love his point 'it's a mistake to go down the same path as everyone else and think that somehow you'll achieve a better result.' As someone once said, you know you have a strategy when you can say no (to an idea or project.)

     
     
     
    • Martha Juy Dom?nguez
    • CEO, Marchar International

    The key to a successful strategy implementation is to work with both the demand and supply side of the equation, as clearly explained by Michael Porter in this excellent interview. As a previous Director of Strategic Planning for Coca-Cola FEMSA, we all did work around the value proposition of "Coke is it", but also tailored our main competitive advantage (distribution), to satisfy different consumer needs and experiences. As marketing evolves through social media, it is essential to keep in mind the relevance of this holistic approach to strategy implementation.

     
     
     
    • Benoit Aumars
    • Technical Manager, Marcura FZE - Dubai

    I've never had Porter's book before. I've read his articles or papers while preparing my master programme, but not his book until this one. Just received few days ago, I found the book very rich in content and easy to read. One of topics covered is about competition and strategy, the difference between 'be the best' and 'being unique'. And also the last chapter, the Q&A, the interview part, in which I found very very inspiring.

     
     
     
    • Andrew Hunter
    • Retired Exectui

    On the point of listening to every customer, just this morning I was buying clothes with my wife in a successful boutique with a 15 year track record. The owner told us she had opened another store in another town, and had to close it. She said she listened to her customers, and they said drop the price, and drop the quality of the range, and we will buy more. They didn't! Fortunately, she has kept her boutique range in her successful store.

     
     
     
    • Linell Malimbag
    • VP Academics, Brokenshire College , Davao City , pHilippines

    I really value my readings of Michael Porter inputs , insights and information on strategic management.

    Thanks you very much from this side of the globe. I cna make use of the information this time when our school inundergoing some difficulties in financial and human resources brought about by decline in enrollment.

     
     
     
    • Mark Seymour
    • Managing Director, Seymour Strategists

    Michael Porter is the strategy guru!!. I use his 5 forces concept as a base for strategic advice to my clients.

    But I cant help thinking as I read this excerpt that the internal sabotage of strategy is a no-brainer!. Anyone who has worked long enough in the consulting field will know no matter how well you develop the strategy the problem remains that business leader(s) will find away to obstruct it or destroy it.

    The success or failure of a strategy is not dependent on the strength of the strategy but on the ability of the CEO/Chair/MD to own the idea and to sell it no holds barred to his supporters and detractors over the longer period.

    This happens so often that maybe WE (the architects of Strategy) need to rethink the whole concept and find a way to avoid this happening. Maybe we are out of step with our clients needs??

     
     
     
    • James Ikpenyi
    • CEO, Jamescomsadc, lda

    Yes you are right, being there for all customers is not possible but deciding which customer and which need to satisfy, how best to sustain the chosen customer.

     
     
     
    • Warren Miller
    • Managing Member, Beckmill Research, LLC

    This is, on balance, a fine interview. It does, however, have two shortcomings, in my view:

    1. Mr. Porter's definition of strategy fails to include an essential financial constraint. When he talks about strategy as "a unique configuration of activities that deliver value," he should add this: ". . .deliver value but retain enough of the value created to exceed the firm's weighted average cost of capital." There value creation, and then there's value retention.

    2. I wish that he had brought up the subject of 'strategic groups.' His 1980 book devotes a long chapter to them. His 1977 QJE paper with Prof. Caves is a world-beater. Most of us work for or with middle-market companies. In that market, the industry-analysis slice really matters. And it matters because, in most competitive domains, the 'industry' isn't that at all: it's a 'strategic group.' Federal Trade Commission data show clearly that the local and regional underpinning of a specific industry structure differs markedly from that of a given industry as a whole. That is why, in most of our work, the 'industry analysis' is done on the strategic group, rather than the industry itself. The process is exactly the same in either case. We use the phrase 'competitive domain' to include both an industry and its constituent 'strategic groups'.