The Essence Of Strategy Is Making Choices: Michael E Porter
Strategy cannot be a popularity contest where everyone gets a vote because the essence of strategy is about choices, says Michael E Porter
Professor Michael E Porter, one of the 24 University Professors at Harvard Business School, is among the few boundary spanners in the world. Returning to India after nearly 14 years, he is slated to meet government leaders to not only discuss the role that strategy plays in creating and sustaining a competitive advantage but also how economic progress requires social progress.
While social progress is not measured with the same rigour that economic progress is, Porter indicated that some work has begun to create a global benchmark on how societies are improving.
Prior to the visit to the Capital, the Harvard University Professor has made a stop in Mumbai. He addressed CEOs and CxOs at the Institute of Competitive Effectiveness’ forum, #PorterPrize, where the focus of the discussion was a strategy.
Porter set the tone of the discussion when he said that even though formulating a sound strategy sounded simple, in reality, it was not.
The CEO’s Role
In his address, Porter spoke on various aspects of strategy, but the biggest takeaway was the role of the Chief Executive Officer. According to him, CEOs are the chief strategy architects of the company. His argument is rooted in the fact that CEOs have an overall perspective into all business functions. This, in turn, leads to certain expectations from the CEO.
The CEO has to define the relevant business units and business groups set the questions to be addressed at each level of strategy and determine who should be involved at each level. The CEO’s personal participation should be to design the process and review the results, monitor and lead the process. “As a leader, create the right process to poise your team to succeed. And then celebrate their work,” Porter advised.
While that is where the process eventually leads to and determines its final success, the first step is to understand what strategy is, and what it is not. “Having a clear strategy has the most impact on any business. Despite knowing and understanding this, there is still immense learning needed,” he observed.
Instinct & Rationale
Citing learnings from the work done in the field, Porter minced no words in stating that the instinct that most leaders have about success is dangerous and potentially distracting. “When you ask a company, what success looks like, the answer is ‘being the best in my industry’. That is a natural human way to think, but in business competition, that is not the way to think about success. The reason is that there is no best company. It is dangerous to do something that is impossible.”
Since there is no one way to compete, a company’s focus should be choose its customers, understand the customer’s needs and compete to be unique, versus competing to be best. The right strategy will depend on finding the unique position and creating values for the chosen set of customers to serve. The worst error in strategy is to compete with rivals on the same dimensions.
“It sounds simple but many companies cannot do it. There is a fundamental inability to make the right choices,” he said.
Know Your Strategy
Porter also warned about the overuse of the word strategy. He simplified the definition in business as a set of choices that are long term and articulate the competitive advantage that companies will seek to create, in order to win.
The strategy also should not be confused for goal and aspirations. It is more than just particular actions – it is holistic. At the same time, it is not a mission statement or values. It is not vague, it is specific.
There can be several levels of strategy. The core level is a business strategy that articulates how to compete in each distinct business. There is also an overall corporate strategy, for larger business group. The latter is also needed but it is a different animal with different rules.
In a business strategy, the larger picture, or the analysis of the industry structure itself cannot be ignored. Businesses have to know the nature of competition, the strategic positioning within the industry and the sustainable competitive advantage. “Business units need to focus both on the attractiveness of their industry as well as their own competitive position. They have to learn to worry about the industry as well. Part of the strategy is to drive a positive transformation in the industry,” he said.
Test of a Successful Strategy
The process towards a successful strategy involves a few basic conditions. Firstly, the strategy has to define a unique value proposition. It cannot do the same thing as competition and it involves choices like who are your customers, what is the relative price you want to operate in, and which customer needs will the company meet uniquely.
Test of a great strategy is the unique value proposition versus competitors and also a distinctive value chain, involving clear choices about how the company will operate differently to value in line with the value proposition. A great strategy does not please every customer. “If you are trying that, you don’t have a strategy,” Porter said.
Making clear tradeoffs and choosing what not to do is part of the test. It is also important to integrate choices across the parts of the value chain so that the functions fit together and reinforce each other.
“Strategy cannot be a popularity contest where everyone gets a vote because the essence of strategy is about choices,” he concluded.