Confusing OE with Strategy

To continue the discussion about Porter’s strategy as it relates to business, I thought I would provide a quotation directly from him to illustrate that beating your competition by setting to acquire the same customer base is in fact a zero sum game. Here is Porter’s quote:

“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.”

Porter then continues later to day that strategy can be affected by pressure by managers to create shareholder value, to obtain and create shareholder value in the short term. Here is more of what Porter had to say:

“The whole emphasis on shareholder value over the past couple of decades has focused managers on the wrong thing when they should really be focusing on creating economic value sustainably over the long term. The capital markets are better at driving OE, better at keeping pressure on companies to improve efficiency and profitability and to use capital better—these are positive influences. But I have no doubt that the markets damage strategy, even if the impact is subtle and mostly unrecognized.”

What I learned about Porter’s response here is that mangers often confuse operational effectiveness with strategy. They are definitely not the same thing. Business schools teach us that the basic principals of starting a business is to state what your mission, vision and values are. Why then are capital markets placing undue pressure to undermine the business?

Since this blog is based in a small town and we offer advice to small businesses, there are pressures as well to be efficient. Small businesses are equally concerned about getting a return on their invested capital, and profits from operating the business. Many small businesses generate incomes for individuals to provide for their families. This to me is the same pressure that is being applied by the capital markets to generate shareholder value.

Any thoughts?

Excerpt From: Joan, Magretta. “Understanding Michael Porter.” Perseus Books Group, 2011-11-21T14:00:00+00:00. iBooks.

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