Strategizing Realistically in Competitive Environments

Statistical evidence indicates that formal strategizing makes insignificant contributions to profits. First, formalization undercuts the value of strategizing. Second, nearly all managers hold very inaccurate perceptions of both their firms and their market environments. Third, no one can forecast accurately over the long term. Fourth, fundamental barriers make it very difficult to attain high profits through strategic actions. However, strategists can make strategizing more realistic and can use it to build healthier, more alert and responsive firms. They can try to develop and exploit distinctive competencies, entry barriers, and proprietary information; they can use forecasts to foster alertness; they can help managers to develop more realistic perceptions; and they can strategize in ways that make it easier to change strategies later. ‘Let me make one thing perfectly clear . . . ‘ This article advances an iconoclastic argument — that formal strategizing generally makes no important contributions to profits. This argument has four bases: One is the formality with which most firms strategize; formalization undercuts formal strategizing’s potential value. A second basis is the existence of fundamental barriers to achieving measurable gains through forecasting and strategizing; these barriers mean that strategizing usually cannot have visible, intended effects on profits. A third basis is the high frequency of large errors in managers’ perceptions of their own firms and their market environments; when managers strategize, most of them are trying to run imaginary firms in imaginary markets. A fourth basis is the impossibility of making accurate long-range forecasts and thus of anticipating the consequences of strategies. It is possible for formal strategizing to help firms to operate more effectively. To do so, however, the strategizing must preserve uncertainty and allow for contingencies. This, in turn, implies that strategists should not take their activities too seriously, and they should advocate common sense in a world that often shuns it. What does research evidence say about the effectiveness of formal strategizing? ‘The war in Vietnam is going well and will succeed.’ — Robert McNamara, U. S. Secretary of Defense, 1963 Everyone does some strategizing informally and strategies are often beneficial. The practical issue is: How much better is it to strategize formally? Formal strategizing is a social process as well as an intellectual one. It involves meetings, discussions, negotiations, and commitments. It builds consensus about perceptions, goals, and roles and it creates rationalizations to support strategic actions.A few years ago, I ran into a surprise when I surveyed the research evidence about the benefits of formal strategizing. Many studies had examined the relationships between formal strategizing and profitability. A few of the earliest studies had found strong correlations between profitability and the degrees to which firms used formal methods of strategizing. However, these early studies had used quite poor