Chapter 4 – Why the Tools Don’t Work

 

Moving from the unreliable and mostly useless strategy methods currently available, requires us to understand why they are so poor, so we can stop adding to them and start to develop more professional methods. This chapter explains three, complementary reasons why strategy methods are so poor.

First, today’s strategy methods reflect decades-long research, which has simply been asking the wrong question – what explains profitability? Finance has known for decades that the worth of a business is the present value of future cash-flows – so what we should be asking is “What drives strong and sustained growth in cash flow?” Secondly, we have looked in the wrong place for the answer – twice! We focused on industry conditions, until we realised there are great successes in appalling tough markets and spectacular failures in industries that look like a licence to print money! Since then research has looked for success in abstract and badly defined features of the business itself. Lastly, we have relied on a method that cannot work – statistical correlation. Strategy builds and sustains simple, tangible things we need over long periods of time – products, staff, customers and so on. So simplistic answers along the lines of “X and Y cause higher profits” cannot be true. Strategy academics have known this doesn’t work for over 20 years, but still persist in doing it.

In spite of the problems with strategy analysis, Kim warns of the dangers from rejecting “analysis” altogether, and adopting instead the “make it up as you go along” school of strategy, recommended by Professor Henry Mitzberg and others. The chapter again ends with some tips, on how to recognise flawed conclusions in strategy findings.

References (Links to be added)

Not all references may be available freely to all readers or in all regions.
Cartoon: Not flawed: emergent

  1. J. L. Bower, 1996, “Research on Strategy Process: A Personal Perspective”, presented at the 1996 Strategy Process Conference, Harvard Business School.
  2. M. H. Hansen, L. T. Perry, and C. S. Reese, 2004, “A Bayesian Operationalization of the Resource-Based View”, Strategic Management Journal, 25(13), pp. 1279–1295.
  3. Paula Jarzabkowski, Monica Giuliett, and Bruno Oliveira, 2011, Building a Strategy Toolkit: Lessons from Business, Advanced Institute of Management Research. Retrieved 20-3-12.
  4. C. K. Prahalad and G. Hamel, 1990, “The Core Competence of the Corporation”, Harvard Business Review, May–June, pp. 79–91.
  5. Malcolm Gladwell, 2000, The Tipping Point: How Little Things Can Make a Big Difference, New York: Little, Brown and Company.
  6. Robert Grant. 2010, Contemporary Strategy Analysis: Concepts, Techniques, Applications, Seventh Edition, Hoboken, NJ: John Wiley & Sons, Inc., pp. 66–67.
  7. Edith T. Penrose, 1959, The Theory of the Growth of the Firm, Oxford, UK: Oxford University Press.
  8. See, for example, “Value and Performance”, McKinsey Quarterly Special Edition, 2005, and Tim Koller, Marc Goedhart, and David Wessels, 2005, Valuation: Measuring and Managing the Value of Companies, Hoboken, NJ: John Wiley & Sons, Inc.
  9. http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual
  10. See Nathaniel J. Mass, 2005, “The Relative Value of Growth”, Harvard Business Review, April, pp. 102–113.
  11. Jim Collins, 2001, Good to Great: Why Some Companies Make the Leap…and Others Don’t, New York: Random House.
  12. Richard Foster and Sarah Kaplan, 2001, Creative Destruction: Why Companies that Are Built to Last Underperform the Market—and How to Successfully Transform Them, New York: Doubleday
  13. McDonalds Annual Report 2002
  14. See, for example, Jay B. Barney, 2001, Gaining and Sustaining Competitive Advantage, Second Edition, Upper Saddle River, NJ: Prentice Hall, Inc., pp. 59–61.
  15. Clayton Christensen and Michael Raynor, 2003, “Why Hard-Nosed Executives Should Care About Management Theory”, Harvard Business Review, September, pp. 66–74.
  16. See Appendix 2, “Problems with Correlation”.
  17. http://www.smsweb.org/
  18. Ingmar Dierickx and Karel Cool, 1989, “Asset Stock Accumulation and Sustainability of Competitive Advantage”, Management Science, 35, pp. 1504–1511.
  19. Thomas Davenport, 2006, Competing on Analytics, Harvard Business Review, 84(1), January, 98-107.
  20. Rakesh Khurana, 2007, From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession. Princeton, NJ: Princeton University Press. See also Malcolm Gilles’ review in Times Higher Education, 12-Feb-2009.
  21. Michael Porter, 1980, Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: The Free Press; Michael Porter, 1985, Competitive Advantage: Creating and Sustaining Superior Performance, New York: The Free Press.
  22. C. K. Prahalad and G. Hamel, 1990, “The Core Competence of the Corporation”, Harvard Business Review, May–June, pp. 79–91.
  23. R. Rumelt, 1991, “How Much Does Industry Matter?” Strategic Management Journal, 12(3), pp.167–185. A. McGahan and M. Porter, 1997, “How Much Does Industry Matter, Really?” Strategic Management Journal (Summer Special Issue), 18, pp. 15–30.
  24. D. Collis and C. Montgomery, 1995, “Competing on Resources: Strategy in the 1990s”, Harvard Business Review, 73(4), pp. 118–128.
  25. Henry Mitzberg, 2005, Managers, not MBAs: A Hard Look at the Soft Practice of Managing and Management Development, San Francisco: Berrett-Koehler Publishers. An interesting review of this book by Eric Nehrlich is available at http://www.nehrlich.com/blog/2005/01/20/managers-not-mbas-by-henry-mintzberg/. Retrieved 23-3-12.
  26. Henry Mintzberg, Bruce Ahlstrand, and Joseph Lampel, 2009, Strategy Safari: Your Complete Guide Through the Wilds of Strategic Management, Second Edition, Harlow, UK: Pearson Education Limited.
  27. A. Inkpen and N. Chouldhury, 1995,”The Seeking of Strategy Where It Is Not: Toward a Theory of Strategic Absence”, Strategic Management Journal, 16, pp.313–323.

 
Cartoon by “Higgins“