Michael Porter opened his classic “five forces” article with these sentences:
“In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly.”
It would be difficult to imagine a more appropriate opening here. In this article, I argue that today’s dominant ideas about the practice of business strategy—defined by Porter in these pages three decades ago—hinge on a specific and therefore partial interpretation of competition. The result is an equally partial picture of the strategist’s job.
The problem lies not in what strategists are trained to do: Porter’s perspective is powerful—so powerful that it has dominated both the teaching and the practice of business strategy for 30 years. The problem lies instead in what strategic leaders are not trained to do. In caricature, Porter’s view casts strategists as practitioner economists who expertly analyze and manage market forces. I suggest that strategic leaders must also be practitioner psychologists who expertly analyze and manage their own and others’ thought processes. To broaden the strategist’s role in this way, I pursue an interpretation of the competitive game that differs from Porter’s. Let us see how.
In thinking about the strategic leader’s job, competition is a natural point of departure. Intense competition makes it difficult for companies to gain attractive returns on investments. This general truth implies that strategists should search for opportunities where competition is weak. Porter’s great insight was that companies compete not only with their direct rivals but also with their customers and suppliers. All these players create value—and compete for a piece of the pie. To identify the best positions, the strategist must pay attention to the entire vertical chain of economic activity. This more-comprehensive picture greatly helps strategists identify successful strategies—which, as Porter asserts, are those that are “different, unique, and distant from the status quo.”
Now let’s look at competition from another, strategist-centered perspective. The strategist must still search for opportunities where competition is weak. But the intensity of competition that a firm faces isn’t considered in the context of how vulnerable the firm is to market forces in the value chain. Instead, it’s considered in the context of how hard it is to identify superior opportunities and deliver on them. An opportunity might be free of competitive pressure precisely because no strategist has been able to conceive of it, or lead the organization toward its execution. Following this logic, the best strategic opportunities are those that are the hardest to spot and execute.
Let’s follow this logic more closely. Imagine a business landscape with numerous opportunities and competitors. Imagine that all these firms are led by omniscient leaders who can see the full landscape of opportunities and easily move their troops toward the desired positions. What would happen in such a scenario? All superior positions would be quickly competed away. But in the real world, strategic leaders are not omniscient, which means superior opportunities remain available. What’s more, because in most businesses strategists have similar mental representations, they perceive and pursue the same opportunities—and overlook the same attractive opportunities.
These overlooked opportunities, which I call “cognitively distant” because recognizing them requires a mental leap, are not only hard to spot. They’re also hard to act on because they often require changes in a firm’s identity, which employees generally resist. And they’re hard to legitimize because they contrast with the representation of the company that key external stakeholders, such as financial analysts, maintain. This way of thinking suggests that a crucial component of strategic leadership is the mental capacity to spot opportunities that are invisible to rivals and to manage other relevant parties’ perceptions to get them on board.
A famous business story highlights the differences between the two perspectives. In the late 1930s, Charlie Merrill took the banking community by surprise with a strategy that extended banking services to a vast new middle-class market and made Merrill Lynch one of the most successful companies in the history of corporate America. Through Porter’s lens, this opportunity existed because one competitive force (customers) was vulnerable to another (banks, as reconceived at Merrill Lynch). Other competitive forces were strong, but customers were weak, and Charlie Merrill capitalized on this vulnerability. Merrill was a great leader, Porter’s lens tells us, because of his superior ability to read the fundamental economics of the business.
But through the lens I’m proposing, a different picture emerges: The opportunity Charlie Merrill discovered—banks as “financial supermarkets” offering an array of products to a variety of customers—had not been exploited earlier because nobody had been able to conceive of it, even though many bankers were frantically scrambling for profits. In other words, Merrill didn’t just read the economics of the business—he reconceived it through an analogy that contained a great insight that other bankers did not have. What’s more, he persuaded both internal employees and external stakeholders, such as customers and capital lenders, that his idea had merit. Merrill was a great leader because of his superior ability to manage mental processes—his own analogical reasoning, which led him to envision the financial-supermarket strategy, and the thinking of others, helping them embrace the reconceptualization of the business and bringing stakeholders on board.
The shift in perspective is radical. It’s a shift from markets to minds, from strategic leaders who need to understand and cope with market forces to ones who also need to understand and cope with mental processes. This shift does not diminish the economic approach to business strategy—an in-depth appreciation of market forces is a crucial component of the strategist’s job. Rather, it mitigates an unintended consequence of the dominance of Porter’s lens: inadequate attention devoted to the strategist’s noneconomic role, especially to the psychological aspects of strategic leadership.
In the pre-Porter era, sophisticated knowledge about market forces existed, but it had not been interpreted through the lens of what it takes to achieve superior performance. It was thus not a useful, actionable guide to competitive strategy. Porter’s key contribution was to develop this lens, using a framework that linked superior opportunities to the intensity of market forces, and showed strategists how to search for vulnerabilities in those forces and exploit them. Today, advances in behavioral and cognitive disciplines give us new knowledge that can usefully expand the strategic leader’s role. Again, we need a lens that helps strategists interpret this knowledge as it relates to the pursuit of superior performance. The lens I propose links superior opportunities to strategic leaders’ ability to spot, act on, and legitimize them. I use recent work in the cognitive and neurological sciences to illuminate how strategic leaders can manage relevant mental processes and overcome their own and others’ cognitive limitations in pursuing distant opportunities.
Michael Porter opened his classic “five forces” article with these sentences:
“In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly.”
It would be difficult to imagine a more appropriate opening here. In this article, I argue that today’s dominant ideas about the practice of business strategy—defined by Porter in these pages three decades ago—hinge on a specific and therefore partial interpretation of competition. The result is an equally partial picture of the strategist’s job.
The problem lies not in what strategists are trained to do: Porter’s perspective is powerful—so powerful that it has dominated both the teaching and the practice of business strategy for 30 years. The problem lies instead in what strategic leaders are not trained to do. In caricature, Porter’s view casts strategists as practitioner economists who expertly analyze and manage market forces. I suggest that strategic leaders must also be practitioner psychologists who expertly analyze and manage their own and others’ thought processes. To broaden the strategist’s role in this way, I pursue an interpretation of the competitive game that differs from Porter’s. Let us see how.
In thinking about the strategic leader’s job, competition is a natural point of departure. Intense competition makes it difficult for companies to gain attractive returns on investments. This general truth implies that strategists should search for opportunities where competition is weak. Porter’s great insight was that companies compete not only with their direct rivals but also with their customers and suppliers. All these players create value—and compete for a piece of the pie. To identify the best positions, the strategist must pay attention to the entire vertical chain of economic activity. This more-comprehensive picture greatly helps strategists identify successful strategies—which, as Porter asserts, are those that are “different, unique, and distant from the status quo.”
Now let’s look at competition from another, strategist-centered perspective. The strategist must still search for opportunities where competition is weak. But the intensity of competition that a firm faces isn’t considered in the context of how vulnerable the firm is to market forces in the value chain. Instead, it’s considered in the context of how hard it is to identify superior opportunities and deliver on them. An opportunity might be free of competitive pressure precisely because no strategist has been able to conceive of it, or lead the organization toward its execution. Following this logic, the best strategic opportunities are those that are the hardest to spot and execute.
Let’s follow this logic more closely. Imagine a business landscape with numerous opportunities and competitors. Imagine that all these firms are led by omniscient leaders who can see the full landscape of opportunities and easily move their troops toward the desired positions. What would happen in such a scenario? All superior positions would be quickly competed away. But in the real world, strategic leaders are not omniscient, which means superior opportunities remain available. What’s more, because in most businesses strategists have similar mental representations, they perceive and pursue the same opportunities—and overlook the same attractive opportunities.
These overlooked opportunities, which I call “cognitively distant” because recognizing them requires a mental leap, are not only hard to spot. They’re also hard to act on because they often require changes in a firm’s identity, which employees generally resist. And they’re hard to legitimize because they contrast with the representation of the company that key external stakeholders, such as financial analysts, maintain. This way of thinking suggests that a crucial component of strategic leadership is the mental capacity to spot opportunities that are invisible to rivals and to manage other relevant parties’ perceptions to get them on board.
A famous business story highlights the differences between the two perspectives. In the late 1930s, Charlie Merrill took the banking community by surprise with a strategy that extended banking services to a vast new middle-class market and made Merrill Lynch one of the most successful companies in the history of corporate America. Through Porter’s lens, this opportunity existed because one competitive force (customers) was vulnerable to another (banks, as reconceived at Merrill Lynch). Other competitive forces were strong, but customers were weak, and Charlie Merrill capitalized on this vulnerability. Merrill was a great leader, Porter’s lens tells us, because of his superior ability to read the fundamental economics of the business.
But through the lens I’m proposing, a different picture emerges: The opportunity Charlie Merrill discovered—banks as “financial supermarkets” offering an array of products to a variety of customers—had not been exploited earlier because nobody had been able to conceive of it, even though many bankers were frantically scrambling for profits. In other words, Merrill didn’t just read the economics of the business—he reconceived it through an analogy that contained a great insight that other bankers did not have. What’s more, he persuaded both internal employees and external stakeholders, such as customers and capital lenders, that his idea had merit. Merrill was a great leader because of his superior ability to manage mental processes—his own analogical reasoning, which led him to envision the financial-supermarket strategy, and the thinking of others, helping them embrace the reconceptualization of the business and bringing stakeholders on board.
The shift in perspective is radical. It’s a shift from markets to minds, from strategic leaders who need to understand and cope with market forces to ones who also need to understand and cope with mental processes. This shift does not diminish the economic approach to business strategy—an in-depth appreciation of market forces is a crucial component of the strategist’s job. Rather, it mitigates an unintended consequence of the dominance of Porter’s lens: inadequate attention devoted to the strategist’s noneconomic role, especially to the psychological aspects of strategic leadership.
In the pre-Porter era, sophisticated knowledge about market forces existed, but it had not been interpreted through the lens of what it takes to achieve superior performance. It was thus not a useful, actionable guide to competitive strategy. Porter’s key contribution was to develop this lens, using a framework that linked superior opportunities to the intensity of market forces, and showed strategists how to search for vulnerabilities in those forces and exploit them. Today, advances in behavioral and cognitive disciplines give us new knowledge that can usefully expand the strategic leader’s role. Again, we need a lens that helps strategists interpret this knowledge as it relates to the pursuit of superior performance. The lens I propose links superior opportunities to strategic leaders’ ability to spot, act on, and legitimize them. I use recent work in the cognitive and neurological sciences to illuminate how strategic leaders can manage relevant mental processes and overcome their own and others’ cognitive limitations in pursuing distant opportunities.
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