Good Strategy/Bad Strategy

Good strategy almost always looks this simple and obvious and does not take a thick deck of PowerPoint slides to explain.

To detect a bad strategy, look for one or more of its four major hallmarks: • Fluff. Fluff is a form of gibberish masquerading as strategic concepts or arguments. It uses “Sunday” words (words that are inflated and unnecessarily abstruse) and apparently esoteric concepts to create the illusion of high-level thinking. • Failure to face the challenge. Bad strategy fails to recognize or define the challenge. When you cannot define the challenge, you cannot evaluate a strategy or improve it. • Mistaking goals for strategy. Many bad strategies are just statements of desire rather than plans for overcoming obstacles. • Bad strategic objectives. A strategic objective is set by a leader as a means to an end. Strategic objectives are “bad” when they fail to address critical issues or when they are impracticable.

If you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have either a stretch goal, a budget, or a list of things you wish would happen.

Strategic objectives should address a specific process or accomplishment, such as halving the time it takes to respond to a customer, or getting work from several Fortune 500 corporations.

A long list of “things to do,” often mislabeled as “strategies” or “objectives,” is not a strategy. It is just a list of things to do. Such lists usually grow out of planning meetings in which a wide variety of stakeholders make suggestions as to things they would like to see done. Rather than focus on a few important items, the group sweeps the whole day’s collection into the “strategic plan.” Then, in recognition that it is a dog’s dinner, the label “long-term” is added so that none of them need be done today.

One common reason for choosing avoidance is the pain or difficulty of choice. When leaders are unwilling or unable to make choices among competing values and parties, bad strategy is the consequence. A second pathway to bad strategy is the siren song of template-style strategy—filling in the blanks with vision, mission, values, and strategies. This path offers a one-size-fits-all substitute for the hard work of analysis and coordinated action. A third pathway to bad strategy is New Thought—the belief that all you need to succeed is a positive mental attitude.

Choice means setting aside some goals in favor of others.

To have a strategy, rather than vague aspirations, is to choose one path and eschew others. There is difficult psychological, political, and organizational work in saying “no” to whole worlds of hopes, dreams, and aspirations. When a strategy works, we tend to remember what was accomplished, not the possibilities that were painfully set aside.

The juxtaposition of vision-led leadership and strategy work had produced a template-style system of “strategic planning.”

The New Thought movement, it combined religious sentiment with recommendations for worldly success. The theory was that thinking about success leads to success. And that thinking about failure leads to failure.

The kernel of a strategy contains three elements: 1. A diagnosis that defines or explains the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical. 2. A guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis. 3. A set of coherent actions that are designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the guiding policy.

A great deal of strategy work is trying to figure out what is going on. Not just deciding what to do, but the more fundamental problem of comprehending the situation.

At a minimum, a diagnosis names or classifies the situation, linking facts into patterns and suggesting that more attention be paid to some issues and less to others. An especially insightful diagnosis can transform one’s view of the situation, bringing a radically different perspective to bear.

The diagnosis for the situation should replace the overwhelming complexity of reality with a simpler story, a story that calls attention to its crucial aspects.

A good strategic diagnosis does more than explain a situation—it also defines a domain of action.

The guiding policy outlines an overall approach for overcoming the obstacles highlighted by the diagnosis. It is “guiding” because it channels action in certain directions without defining exactly what shall be done.

They define a method of grappling with the situation and ruling out a vast array of possible actions.

This “vision” communicates an ambition, but it is not a strategy or a guiding policy because there is no information about how this ambition will be accomplished.

Good strategy is not just “what” you are trying to do. It is also “why” and “how” you are doing it. A good guiding policy tackles the obstacles identified in the diagnosis by creating or drawing upon sources of advantage.

Strategic advantage multiplies the effectiveness of resources and/or actions.

A guiding policy creates advantage by anticipating the actions and reactions of others, by reducing the complexity and ambiguity in the situation, by exploiting the leverage inherent in concentrating effort on a pivotal or decisive aspect of the situation, and by creating policies and actions that are coherent, each building on the other rather than canceling one another out. (These

Strategy is about action, about doing something. The kernel of a strategy must contain action. It does not need to point to all the actions that will be taken as events unfold, but there must be enough clarity about action to bring concepts down to earth. To have punch, actions should coordinate and build upon one another, focusing organizational energy.

Strategic actions that are not coherent are either in conflict with one another or taken in pursuit of unrelated challenges.

The idea that coordination, by itself, can be a source of advantage is a very deep principle. It is often underappreciated because people tend to think of coordination in terms of continuing mutual adjustments among agents. Strategic coordination, or coherence, is not ad hoc mutual adjustment. It is coherence imposed on a system by policy and design. More specifically, design is the engineering of fit among parts, specifying how actions and resources will be combined.

Strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and making a concentrated application of effort.

In competitive strategy, the key anticipations are often of buyer demand and competitive reactions.

In many circumstances, anticipation simply means considering the habits, preferences, and policies of others, as well as various inertias and constraints on change.

Pivot point magnifies the effect of effort. It is a natural or created imbalance in a situation, a place where a relatively small adjustment can unleash much larger pent-up forces. The business strategist senses such imbalances in pent-up demand that has yet to be fulfilled or in a robust competence developed in one context that can be applied to good effect in another.

A “threshold effect” exists when there is a critical level of effort necessary to affect the system. Levels of effort below this threshold have little payoff. When there are threshold effects, it is prudent to limit objectives to those that can be affected by the resources at the strategist’s disposal.

From a psychological perspective, there can be returns to focus or concentration when people ignore signals below a certain threshold (called a “salience effect” in psychology) or when they believe in momentum—that success leads to success.

A proximate objective names a target that the organization can reasonably be expected to hit, even overwhelm.

An important duty of any leader is to absorb a large part of that complexity and ambiguity, passing on to the organization a simpler problem—one that is solvable.

The more dynamic the situation, the poorer your foresight will be. Therefore, the more uncertain and dynamic the situation, the more proximate a strategic objective must be.

What one single feasible objective, when accomplished, would make the biggest difference?

To concentrate on an objective—to make it a priority—necessarily assumes that many other important things will be taken care of.

A system has a chain-link logic when its performance is limited by its weakest subunit, or “link.” When there is a weak link, a chain is not made stronger by strengthening the other links.

The problem arises because of quality matching.1 That is, if you are in charge of one link of the chain, there is no point in investing resources in making your link better if other link managers are not.

When someone says “Managers are decision makers,” they are not talking about master strategists, for a master strategist is a designer.

Good strategy is design, and design is about fitting various pieces together so they work as a coherent whole.

The threats to the company are not specific new products or competitive moves, but changes that undermine the logic of its design.

Begin identifying a company’s strategy, it is usually most helpful to examine the competitive environment. That is, to look at how the major competitors make their livings.

How can we independently identify a company’s strategy? We do this by looking at each policy of the company and noticing those that are different from the norm in the industry. We then try to figure out the common target of such distinctive policies—what they are coordinated on accomplishing.”

Healthy growth is not engineered. It is the outcome of growing demand for special capabilities or of expanded or extended capabilities. It is the outcome of a firm having superior products and skills. It is the reward for successful innovation, cleverness, efficiency, and creativity. This kind of growth is not just an industry phenomenon. It normally shows up as a gain in market share that is simultaneous with a superior rate of profit.

You must press where you have advantages and side-step situations in which you do not. You must exploit your rivals’ weaknesses and avoid leading with your own.

The basic definition of competitive advantage is straightforward. If your business can produce at a lower cost than can competitors, or if it can deliver more perceived value than can competitors, or a mix of the two, then you have a competitive advantage. Subtlety arrives when you realize that costs vary with product and application and that buyers differ in their locations, knowledge, tastes, and other characteristics. Thus, most advantages will extend only so far. For

For an advantage to be sustained, your competitors must not be able to duplicate it. Or, more precisely, they must not be able to duplicate the resources underlying it. For that you must possess what I term an “isolating mechanism,” such as a patent giving its holder the legally enforceable right to monopolize the use of a technology for a time.2 More complex forms of isolating mechanisms include reputations, commercial and social relationships, network effects,* dramatic economies of scale, and tacit knowledge and skill gained through experience.

Owning, buying, or selling a competitive advantage. The truth is that the connection between competitive advantage and wealth is dynamic. That is, wealth increases when competitive advantage increases or when the demand for the resources underlying it increases. In particular, increasing value requires a strategy for progress on at least one of four different fronts: • deepening advantages, • broadening the extent of advantages, • creating higher demand for advantaged products or services, or • strengthening the isolating mechanisms that block easy replication and imitation by competitors.

Start by defining advantage in terms of surplus—the gap between buyer value and cost. Deepening an advantage means widening this gap by either increasing value to buyers, reducing costs, or both.*

The underlying principle is that improvements come from reexamining the details of how work is done,

Extending an existing competitive advantage brings it into new fields and new competitions.

Extending a competitive advantage requires looking away from products, buyers, and competitors and looking instead at the special skills and resources that underlie a competitive advantage. In other words, “Build on your strengths.”

A competitive advantage becomes more valuable when the number of buyers grows and/or when the quantity demanded by each buyer increases. Technically, it is

Engineering higher demand for the services of scarce resources is actually the most basic of business stratagems.

The most obvious approach to strengthening isolating mechanisms is working on stronger patents, brand-name protections, and copyrights. When a new product is developed, its protection may be strengthened by stretching an already powerful brand name to cover it.

Another broad approach to strengthening isolating mechanisms is to have a moving target for imitators. In a static setting, rivals will sooner or later figure out how to duplicate much of your proprietary know-how and other specialized resources. However, if you can continually improve, or simply alter, your methods and products, rivals will have a much harder time with imitation.

A leader’s job is to provide the insight, skill, and inventiveness that can harness that power to a purpose. You exploit a wave of change by understanding the likely evolution of the landscape and then channeling resources and innovation toward positions that will become high ground—become valuable and defensible—as the dynamics play out.

Believing that today’s changes are huge, dwarfing those in the past, reflects an ignorance of history.

Historical perspective helps you make judgments about importance and significance.

Seek to perceive and deal with a wave of change in its early stages of development. The challenge is not forecasting but understanding the past and present. Out of the myriad shifts and adjustments that occur each year, some are clues to the presence of a substantial wave of change and, once assembled into a pattern, point to the fundamental forces at work. The evidence lies in plain sight, waiting for you to read its deeper meanings.

You must dig beneath this surface reality to understand the forces underlying the main effect and develop a point of view about the second-order and derivative changes that have been set into motion.

To make good bets on how a wave of change will play out you must acquire enough expertise to question the experts.

Leaders who stay “above the details” may do well in stable times, but riding a wave of change requires an intimate feel for its origins and dynamics.

To aid my own vision into the fog of change I use a number of mental guideposts. Each guidepost is an observation or way of thinking that seems to warrant attention.

The simplest form of transition is triggered by substantial increases in fixed costs, especially product development costs. This increase may force the industry to consolidate because only the largest competitors can cover these fixed charges.

Many major transitions are triggered by major changes in government policy, especially deregulation. In the past thirty years, the federal government has dramatically changed the rules it imposes on the aviation, finance, banking, cable television, trucking, and telecommunications industries. In each case, the competitive terrain shifted dramatically.

In seeing what is happening during a change it is helpful to understand that you will be surrounded by predictable biases in forecasting. For instance, people rarely predict that a business or economic trend will peak and then decline.

In general, we expect incumbent firms to resist a transition that threatens to undermine the complex skills and valuable positions they have accumulated over time.

An industry attractor state describes how the industry “should” work in the light of technological forces and the structure of demand. By saying “should,” I mean to emphasize an evolution in the direction of efficiency—meeting the needs and demands of buyers as efficiently as possible.

An attractor state provides a sense of direction for the future evolution of an industry. There is no guarantee that this state will come to be, but it does represent a gravitylike pull. The critical distinction between an attractor state and many corporate “visions” is that the attractor state is based on overall efficiency rather than a single company’s desire to capture most of the pie.

Two complements to attractor-state analysis are the identification of accelerants and impediments to movements toward an attractor state.

Successful strategies often owe a great deal to the inertia and inefficiency of rivals.

An organization’s greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia.

You will also glimpse almost every building block of good strategy: intelligent anticipation, a guiding policy that reduced complexity, the power of design, focus, using advantage, riding a dynamic wave of change, and the important role played by the inertia and disarray of rivals.

When a product gives a buyer an advantage in competition with others, there will be an especially rapid uptake of the product. When, for example, the first spreadsheet, VisiCalc, appeared in 1979, it provided an edge to MBA students, financial analysts, and other professionals who used it. VisiCalc

The benefit of a faster cycle is that the product will be best in class more often. Compared to a competitor working on an eighteen-month cycle,

As a further plus, the faster company’s engineers will get more experience and, perhaps, learn more about the tricks of turning the technology into product.

A change in technology will often set in motion a change in industry structure.

A good strategy is, in the end, a hypothesis about what will work. Not a wild theory, but an educated judgment. And there isn’t anyone more educated about your businesses than the group in this room.

The anomalies are not in nature but in the mind of the acute observer, revealed by a comparison between the facts and refined expectations.

To expect to make money from a new business, the entrepreneur should know something that others do not, or have control of a scarce and valuable resource.

One of the most important resources a business can have is valuable privileged information—that is, knowing something that others do not. There is nothing arcane or illicit about such information—it is generated every day in every operating business. All alert businesspeople can know more about their own customers, their own products, and their own production technology than anyone else in the world.

Making a list is a basic tool for overcoming our own cognitive limitations. The list itself counters forgetfulness. The act of making a list forces us to reflect on the relative urgency and importance of issues. And making a list of “things to do, now” rather than “things to worry about” forces us to resolve concerns into actions.

Thus, the most experienced executives are actually the quickest to sense that a real strategic situation is impervious to so-called decision analysis. They know that dealing with a strategy situation is, in the end, all about making good judgments. So, they make a judgment call.

To guide your own thinking in strategy work, you must cultivate three essential skills or habits. First, you must have a variety of tools for fighting your own myopia and for guiding your own attention. Second, you must develop the ability to question your own judgment. If your reasoning cannot withstand a vigorous attack, your strategy cannot be expected to stand in the face of real competition. Third, you must cultivate the habit of making and recording judgments so that you can improve.

Identifying the difficulties and obstacles will give you a much clearer picture of the pattern of existing and possible strategies. Even more important, you will gain access to how changes in some factors may radically alter the mix of efficacious strategies. To gain this change in perspective, shift your attention from what is being done to why it is being done, from the directions chosen to the problems that these choices address.

A new alternative should flow from a reconsideration of the facts of the situation, and it should also address the weaknesses of any already developed alternatives. The creation of new higher-quality alternatives requires that one try hard to “destroy” any existing alternatives, exposing their fault lines and internal contradictions. I call this discipline create-destroy.

Thinking through how a particular well-remembered expert might respond to a problem can be a richer source of criticism and advice than abstract theories or frameworks.

When I face a problem, or have generated a first hunch, I turn to this panel and ask, “What is wrong with this approach to the situation? What would you do in this case?”

I am convinced that judgment can be improved with practice. For that practice to be effective, you should first commit your judgments to writing.