Chapter 4 argues that if we are to get better methods for strategy, it might help to know why the methods we have don’t work – a story that is actually quite simple. First, research asked the wrong question – what determines profitability (return on invested capital or similar), but we know investor value comes from growing cash flow. Research also looked in the wrong places for the answer – first, industry conditions and then weird features of businesses that are meaningless to management. Lastly, research has relied on a method that cannot work – correlation analysis – to provide “explanations” for profitability.
The resulting failure to provide any methods that work had two unfortunate results – it opened the door to journalistic strategy-by-anecdote, expressed in the many fads and fashions in the field, and it opened the door to those who favour an “emergent” approach – translated as “make it up as you go along” – as promoted by Professor Mintzberg and friends. We might get better strategy tools if we asked the right question (what drives growth in cash-flows) looked in the right place for the answer (the decisions and actions management make to build and sustain the hard, simple things that make up a business) and used decent tools with a rock-solid theoretical platform, such as strategy dynamics.
How well understood is the principle that investor value comes from growing cash-flows (folk would probably get the idea if it were their own business!)? Is management as badly focused on profitability as the academics who produce the theories that are supposed to help them? Which companies are the stars at delivering this true measure of value (rather than the froth of stock-price changes)? Does anyone out there actually do emergent strategy, and how well do they perform – and is the idea really as bad as I claim?Share