By Richard Rumelt
By far the best book on strategy that I've read. A personal recommendation from the CEO of Nestle in the Nordic region.
Dr. Rumelt explains the very essence of what Strategy really is. In a nutshell, Strategy is not a list of wishes that attempt to reach a desirable state; rather than that, Strategy is a design of thought that deals with a challenge that an organization faces. Such design has three fundamental parts; a Diagnostic, a Guiding Policy and a Set of Coherent Actions.
In the end, Good Strategy / Bad Strategy influenced and shaped my own thinking. Highly recommended for managers, executives, politicians and consultants.
Amazon Page for details
My Rating: 10 / 10
Click Here to Read My Notes
By far the best book on strategy that I've read. A personal recommendation from the CEO of Nestle in the Nordic region.
Dr. Rumelt explains the very essence of what Strategy really is. In a nutshell, Strategy is not a list of wishes that attempt to reach a desirable state; rather than that, Strategy is a design of thought that deals with a challenge that an organization faces. Such design has three fundamental parts; a Diagnostic, a Guiding Policy and a Set of Coherent Actions.
In the end, Good Strategy / Bad Strategy influenced and shaped my own thinking. Highly recommended for managers, executives, politicians and consultants.
Amazon Page for details
My Rating: 10 / 10
Click Here to Read My Notes
A talented leader identifies the one or two critical issues in the situation—the pivot points that can multiply the effectiveness of effort—and then focuses and concentrates action and resources on them.
The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.
A good strategy does more than urge us forward toward a goal or vision. A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them.
Unfortunately, good strategy is the exception, not the rule.
Further confusion is created by equating strategy with success or with ambition.
Rather, the term “strategy” should mean a cohesive response to an important challenge. Unlike a stand-alone decision or a goal, a strategy is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge.
A good strategy includes a set of coherent actions. They are not “implementation” details; they are the punch in the strategy. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.
The most basic idea of strategy is the application of strength against weakness. Or, if you prefer, strength applied to the most promising opportunity.
The first natural advantage of good strategy arises because other organizations often don’t have one.
Steve Jobs’s answer that day—“to wait for the next big thing”—is not a general formula for success. But it was a wise approach to Apple’s situation at that moment, in that industry, with so many new technologies seemingly just around the corner.
The second natural advantage of many good strategies comes from insight into new sources of strength and weakness.
Looking at things from a different or fresh perspective can reveal new realms of advantage and opportunity as well as weakness and threat.
In making an integrated network into the operating unit of the company, instead of the individual store, Walton broke with an even deeper conventional wisdom of his era: the doctrine of decentralization, that each kettle should sit on its own bottom.
Use your relative advantages to impose out-of-proportion costs on the opposition and complicate his problem of competing with you.
If Marshall and Roche’s strategy was one of them, and I believe it was, then it compels our attention.
Their insight was framed in the language of business strategy: identify your strengths and weaknesses, assess the opportunities and risks (your opponent’s strengths and weaknesses), and build on your strengths.
But Marshall and Roche, like Sam Walton, had an insight that, when acted upon, provided a much more effective way to compete—the discovery of hidden power in the situation.
Once you develop the ability to detect bad strategy, you will dramatically improve your effectiveness at judging, influencing, and creating strategy.
Bad strategy is long on goals and short on policy or action. It assumes that goals are all you need. It puts forward strategic objectives that are incoherent and, sometimes, totally impracticable. It uses high-sounding words and phrases to hide these failings.
A hallmark of true expertise and insight is making a complex subject understandable. A hallmark of mediocrity and bad strategy is unnecessary complexity—a flurry of fluff masking an absence of substance.
A strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge. If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy. And if you cannot assess a strategy’s quality, you cannot reject a bad strategy or improve a good one.
The job of the leader is also to create the conditions that will make that push effective, to have a strategy worthy of the effort called upon.
You can call these annual exercises “strategic planning” if you like, but they are not strategy. They cannot deliver what senior managers want: a pathway to substantially higher performance.
To help clarify this distinction it is helpful to use the word “goal” to express overall values and desires and to use the word “objective” to denote specific operational targets.
Good strategy works by focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes.
When a leader characterizes the challenge as underperformance, it sets the stage for bad strategy. Underperformance is a result. The true challenges are the reasons for the underperformance.
Bad strategy generates a feeling of dull annoyance when you have to listen to it or read it.
One common reason for choosing avoidance is the pain or difficulty of choice.
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.
Strategy involves focus and, therefore, choice.
Whatever you think about this definition of leadership, a problem arises when it is confused with strategy.
One might conclude that if the audience for this verbiage is happy, why care? The enormous problem all this creates is that someone who actually wishes to conceive and implement an effective strategy is surrounded by empty rhetoric and bad examples. And the general public is either led astray or puts all such pronouncements into the same mental bin as late-night TV advertising.
Ascribing the success of Ford and Apple to a vision, shared at all levels, rather than pockets of outstanding competence mixed with luck, is a radical distortion of history.
Similarly, Ford’s “cars for everyman” vision was hardly unique and not necessarily shared by the five-dollar-a-day assembly line workers. Detroit was the “Silicon Valley” of 1907 and there were hundreds, even thousands, of engineers and tinkerers working on ways to make and sell automobiles. Ford’s special genius was in materials, industrial engineering, and promotion.
But I do know that believing that rays come out of your head and change the physical world, and that by thinking only of success you can become a success, are forms of psychosis and cannot be recommended as approaches to management or strategy.
Nevertheless, the doctrine that one can impose one’s visions and desires on the world by the force of thought alone retains a powerful appeal to many people. Its acceptance displaces critical thinking and good strategy.
Good strategy is coherent action backed up by an argument, an effective mixture of thought and action with a basic underlying structure I call the kernel.
The kernel of a strategy contains three elements:
Here are some examples: For a doctor, the challenge appears as a set of signs and symptoms together with a history. The doctor makes a clinical diagnosis, naming a disease or pathology. The therapeutic approach chosen is the doctor’s guiding policy. The doctor’s specific prescriptions for diet, therapy, and medication are the set of coherent actions to be taken.
A great deal of strategy work is trying to figure out what is going on.
Additionally, making the diagnosis an explicit element of the strategy allows the rest of the strategy to be revisited and changed as circumstances change.
Whereas a social scientist seeks a diagnosis that best predicts outcomes, good strategy tends to be based on the diagnosis promising leverage over outcomes.
Kennan’s containment and Gerstner’s drawing on all of IBM’s resources to solve customers’ problems are examples of guiding policies.
Good guiding policies are not goals or visions or images of desirable end states. Rather, they define a method of grappling with the situation and ruling out a vast array of possible actions.
Good strategy is not just “what” you are trying to do. It is also “why” and “how” you are doing it.
When I say strategy is “imposed,” I mean just that. It is an exercise in centralized power, used to overcome the natural workings of a system.
In very general terms, a good strategy works by harnessing power and applying it where it will have the greatest effect.
A good strategy draws power from focusing minds, energy, and action.
In competitive strategy, the key anticipations are often of buyer demand and competitive reactions.
The most critical anticipations are about the behavior of others, especially rivals.
Some of the most striking anticipations made in any modern business were created by Pierre Wack and Ted Newland of Group Planning at Shell International. I got to know Pierre Wack in 1980. He told me that “certain aspects of future events are predetermined: If there is a storm in the Himalayas, you can confidently predict that tomorrow, or the next day, there will be flooding in the Ganges plain.
Anticipation does not require psychic powers. In many circumstances, anticipation simply means considering the habits, preferences, and policies of others, as well as various inertias and constraints on change.
To achieve leverage, the strategist must have insight into a pivot point that will magnify the effects of focused energy and resources.
That is the power of concentration—of choosing an objective that can be decisively affected by the resources at hand.
One of a leader’s most powerful tools is the creation of a good proximate objective—one that is close enough at hand to be feasible.
The proximate objective is guided by forecasts of the future, but the more uncertain the future, the more its essential logic is that of “taking a strong position and creating options,” not of looking far ahead.
Then I asked the group to imagine that they were allowed to have only one objective. And the objective had to be feasible. What one single feasible objective, when accomplished, would make the biggest difference?
Despite all these cautions, I believe that if you are careful about the level of abstraction, you can take certain fundamental lessons from military history and be the wiser for doing so.
In the case at hand, Hannibal was certainly not briefed by a staff presenting four options arranged on a PowerPoint slide. Rather, he faced a challenge and he designed a novel response.
Today, as then, many effective strategies are more designs than decisions—are more constructed than chosen.
When someone says “Managers are decision makers,” they are not talking about master strategists, for a master strategist is a designer.
A design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation. Given a set bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions. Given a set level of challenge, higher-quality resources lessen the need for the tight integration of resources and actions.
A strategic resource is a kind of property that is fairly long lasting that has been constructed, developed over time, designed, or discovered by a company and that competitors cannot duplicate without suffering a net economic loss.
A high-quality strategic resource yielding a powerful competitive advantage makes for great strategic simplicity.
Good strategy is design, and design is about fitting various pieces together so they work as a coherent whole.
“Suppose Fortune magazine, Harvard Business School case writers, and stock analysts all say Crown’s strategy is a focus on hard-to-hold applications—carbonated beverages and aerosols. But also suppose that we are very stubborn. We want to do our own analysis. If you are serious about strategy work, you must always do your own analysis. A strategy is not necessarily what the CEO intended or what some executive says it is. Sometimes they are hiding the truth, sometimes they are misstating it, and sometimes they have taken a position as leader without really knowing the reasons for their company’s success.
“If we are not going to automatically accept the opinions of others, 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.
When faced with a question or problem to which there is no obvious answer, it is human nature to welcome the first seemingly reasonable answer that pops into mind, as if it were a life preserver in a choppy sea. The discipline of analysis is to not stop there, but to test that first insight against the evidence.
Using the diagrams for emphasis, I summarize what we have discovered. Crown and the majors are in the same industry but are playing by different rules. By concentrating on a carefully selected part of the market, Crown has not only specialized, it has increased its bargaining power with respect to its buyers. Thus, it captures a larger fraction of the value it creates. The majors, by contrast, have larger volumes of business but capture much lower fractions of the value they create. Thus, Crown crafted a competitive advantage in its target market. It isn’t the biggest can maker, but it makes the most money.
Here, the word “focus” has two meanings. First, it denotes the coordination of policies that produces extra power through their interacting and overlapping effects. Second, it denotes the application of that power to the right target.
But the truth is that many companies, especially large complex companies, don’t really have strategies. At the core, strategy is about focus, and most complex organizations don’t focus their resources. Instead, they pursue multiple goals at once, not concentrating enough resources to achieve a breakthrough in any of them.
As quoted earlier, when Avery took over at Crown he complained that “the company’s growth had slowed down.” It had. During the ten years (1980–89) before Avery become CEO at Crown, revenues grew at only 3.1 percent per year. However, it had nevertheless generated an annual average return to shareholders of 18.5 percent, enormously more than the 8.6 percent achieved by the S&P 500 during the same period. During the seventeen years after Connelly stepped down, from 1990 to 2006, the company grew rapidly, becoming the “leading” container maker in the world. But an owner of Crown’s common stock received a return of only 2.4 percent per year, much lower than the 9 percent provided by the S&P 500 Index.
Avery chose to grow the corporation by acquisition with an emphasis on the PET business, attracted by the growth in that industry. The problem was that he left the company’s traditional competitive advantage behind without replacing it.
He did not choose to understand the deeper meaning of focus—a concentration and coordination of action and resources that creates an advantage. Instead, he and CEO Avery were mesmerized by the prospects of expansion.
The proposition that growth itself creates value is so deeply entrenched in the rhetoric of business that it has become an article of almost unquestioned faith that growth is a good thing.
The problem with engineering growth by acquisition is that when you buy a company, especially a public company, you usually pay too much. You pay a premium over its ordinary market value—usually about 25 percent—plus fees. If you have friendly investment bankers and lenders, you can grow as fast as you like by acquisition. But unless you can buy companies for less than they are worth, or unless you are specially positioned to add more value to the target than anyone else can, no value is created by such expansion.
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.
advantage is rooted in differences—in the asymmetries among rivals. In real rivalry, there are an uncountable number of asymmetries. It is the leader’s job to identify which asymmetries are critical—which can be turned into important advantages.
The term “competitive advantage” became a term of art in business strategy with Michael Porter’s 1984 insightful book of that title. Indeed, Warren Buffett has said that he evaluates a company by looking for “sustainable competitive advantage.
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.
Claims in advertising or sales pitches that a particular IT system or product or training program will provide a competitive advantage are misusing the term since an “advantage” on sale to all comers is a contradiction in terms.
“By providing more value you avoid being a commodity. The bottled water field is crowded, but Lynda saw something unique in this product—water from a deep aquifer in Fiji that has been naturally filtered for several hundred years. Water that fell to earth before the industrial age, before pollution and chemicals. It is a unique proposition that the original owners had not exploited.
“To me, a business is ‘interesting’ when I can see ways to increase its value.
The conundrum disappears when you carefully distinguish between competitive advantage and financial gain—many have assumed that they are the same thing, but they are not.
For Stewart Resnick, and now for me, a competitive advantage is interesting when one has insights into ways to increase its value. That means there must be things you can do, on your own, to increase its value.
Although there are no ways (by definition) to alter the silver machine’s advantage, there are a myriad of ways to change eBay’s services, its efficiency, and the uses to which its resources and skills are put. So, eBay’s advantage is potentially interesting. It will become truly interesting when someone gains special insights into unexploited ways to expand the value of eBay’s already considerable competitive advantages.
Many strategy experts have equated competitive advantage with high profitability.
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.
A brand’s value comes from guaranteeing certain characteristics of the product.
One way to find fresh undefended high ground is by creating it yourself through pure innovation. Dramatic technical inventions, such as Gore-Tex, or business model innovations, such as FedEx’s overnight delivery system, create new high ground that may last for years before competitors appear at the ramparts.
The other way to grab the high ground—the way that is my focus here—is to exploit a wave of change.
When change occurs, most people focus on the main effects—the spurts in growth of new types of products and the falling demand for others. 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.
As changes begin to occur, the air will be full of comments about what is happening, but you must be able to dig beneath that surface and discover the fundamental forces at work.
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.
It is hard to show your skill as a sailor when there is no wind. Similarly, it is in moments of industry transition that skills at strategy are most valuable.
“This course is labeled ‘advanced’ because we don’t understand it very well.” He explained, “If there were a clear and consistent theory about what is going on here, we would call this course ‘elementary’ physics.
Fortunately, a leader does not need to get it totally right—the organization’s strategy merely has to be more right than those of its rivals.
If you can peer into the fog of change and see 10 percent more clearly than others see, then you may gain an edge.
The first guidepost demarks an industry transition induced by escalating fixed costs. The second calls out a transition created by deregulation. The third highlights predictable biases in forecasting. A fourth marks the need to properly assess incumbent response to change. And the fifth guidepost is the concept of an attractor state.
Inertia and entropy have several important implications for strategy:
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.
Organizational inertia generally falls into one of three categories: the inertia of routine, cultural inertia, and inertia by proxy.
We use the word “culture” to mark the elements of social behavior and meaning that are stable and strongly resist change.
The first step in breaking organizational culture inertia is simplification. This helps to eliminate the complex routines, processes, and hidden bargains among units that mask waste and inefficiency.
Follow the story of Nvidia and you will clearly see the kernel of a good strategy at work: diagnosis, guiding policy, and coherent action.
When a product gives a buyer an advantage in competition with others, there will be an especially rapid uptake of the product.
In creating strategy, it is often important to take on the viewpoints of others, seeing how the situation looks to a rival or to a customer.
Good strategy is built on functional knowledge about what works, what doesn’t, and why.
A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment. As results appear, good leaders learn more about what does and doesn’t work and adjust their strategies accordingly.
STRATEGY IS A HYPOTHESIS
Treating strategy like a problem in deduction assumes that anything worth knowing is already known—that only computation is required.
In science, a new idea or theory is called a hypothesis, a fancy word for a testable explanation for something that happens.
A strategy is, like a scientific hypothesis, an educated prediction of how the world works.
The ultimate worth of a strategy is determined by its success, not its acceptability to a council of philosophers or a board of editors.
Schultz formed a strategic hypothesis—the Italian espresso experience could be re-created in America and the public would embrace it.
Howard Schultz envisioned an Italian espresso bar in Seattle. He tested this hypothesis and found it wanting. But the test produced additional information, so he modified his hypothesis and retested. After hundreds of iterations, the original hypothesis has long since vanished, replaced by a myriad of new hypotheses, each covering some aspect of the growing, evolving business.
This process of learning—hypothesis, data, anomaly, new hypothesis, data, and so on—is called scientific induction and is a critical element of every successful business.
Starbucks did not vertically integrate to purposefully confuse the competition. It did so in order to be able to mutually adjust multiple elements of its business and to capture the information generated by each element of its business operations.
The kernel is a list reminding us that a good strategy has, at a minimum, three essential components: a diagnosis of the situation, the choice of an overall guiding policy, and the design of coherent action.
People normally think of strategy in terms of action—a strategy is what an organization does. But strategy also embodies an approach to overcoming some difficulty.
Identifying the difficulties and obstacles will give you a much clearer picture of the pattern of existing and possible 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.
Since guiding the development of the Macintosh computer, Jobs’s basic operating principles have become the stuff of legend: (1) imagine a product that is “insanely great,” (2) assemble a small team of the very best engineers and designers in the world, (3) make the product visually stunning and easy to use, pouring innovation into the user interface, (4) tell the world how cool and trendy the product is with innovative advertising.
Listening to Teece’s and Jobs’s imaginary counsel, I am reminded that good strategies are usually “corner solutions.” That is, they emphasize focus over compromise. They focus on one aspect of the situation, not trying to be all things to all people.
Good strategy grows out of an independent and careful assessment of the situation, harnessing individual insight to carefully crafted purpose.
Bad strategy follows the crowd, substituting popular slogans for insights.
Economies of scale have always played a central role in strategy thinking.
The introductory topic taught in any modern course on business strategy is the connection between industry structure and profit.
A quick summary is that a terrible industry looks like this: the product is an undifferentiated commodity; everyone has the same costs and access to the same technology; and buyers are price sensitive, knowledgeable, and willing to switch suppliers at a moment’s notice to get a better deal.
It has always been understood that stock prices reflect expectations about future profits. But the doctrine that stock prices are trustworthy, accurate estimators of future profits arose in the 1970s and was in full bloom by 1999.
Social herding presses us to think that everything is OK (or not OK) because everyone else is saying so.
The inside view presses us to ignore the lessons of other times and other places, believing that our company, our nation, our new venture, or our era is different.
It is important to push back against these biases.
You can do this by paying attention to real-world data that refutes the echo-chamber chanting of the crowd—and by learning the lessons taught by history and by other people in other places.
The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.
A good strategy does more than urge us forward toward a goal or vision. A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them.
Unfortunately, good strategy is the exception, not the rule.
Further confusion is created by equating strategy with success or with ambition.
Rather, the term “strategy” should mean a cohesive response to an important challenge. Unlike a stand-alone decision or a goal, a strategy is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge.
A good strategy includes a set of coherent actions. They are not “implementation” details; they are the punch in the strategy. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.
The most basic idea of strategy is the application of strength against weakness. Or, if you prefer, strength applied to the most promising opportunity.
The first natural advantage of good strategy arises because other organizations often don’t have one.
Steve Jobs’s answer that day—“to wait for the next big thing”—is not a general formula for success. But it was a wise approach to Apple’s situation at that moment, in that industry, with so many new technologies seemingly just around the corner.
The second natural advantage of many good strategies comes from insight into new sources of strength and weakness.
Looking at things from a different or fresh perspective can reveal new realms of advantage and opportunity as well as weakness and threat.
In making an integrated network into the operating unit of the company, instead of the individual store, Walton broke with an even deeper conventional wisdom of his era: the doctrine of decentralization, that each kettle should sit on its own bottom.
Use your relative advantages to impose out-of-proportion costs on the opposition and complicate his problem of competing with you.
If Marshall and Roche’s strategy was one of them, and I believe it was, then it compels our attention.
Their insight was framed in the language of business strategy: identify your strengths and weaknesses, assess the opportunities and risks (your opponent’s strengths and weaknesses), and build on your strengths.
But Marshall and Roche, like Sam Walton, had an insight that, when acted upon, provided a much more effective way to compete—the discovery of hidden power in the situation.
Once you develop the ability to detect bad strategy, you will dramatically improve your effectiveness at judging, influencing, and creating strategy.
Bad strategy is long on goals and short on policy or action. It assumes that goals are all you need. It puts forward strategic objectives that are incoherent and, sometimes, totally impracticable. It uses high-sounding words and phrases to hide these failings.
A hallmark of true expertise and insight is making a complex subject understandable. A hallmark of mediocrity and bad strategy is unnecessary complexity—a flurry of fluff masking an absence of substance.
A strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge. If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy. And if you cannot assess a strategy’s quality, you cannot reject a bad strategy or improve a good one.
The job of the leader is also to create the conditions that will make that push effective, to have a strategy worthy of the effort called upon.
You can call these annual exercises “strategic planning” if you like, but they are not strategy. They cannot deliver what senior managers want: a pathway to substantially higher performance.
To help clarify this distinction it is helpful to use the word “goal” to express overall values and desires and to use the word “objective” to denote specific operational targets.
Good strategy works by focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes.
When a leader characterizes the challenge as underperformance, it sets the stage for bad strategy. Underperformance is a result. The true challenges are the reasons for the underperformance.
Bad strategy generates a feeling of dull annoyance when you have to listen to it or read it.
One common reason for choosing avoidance is the pain or difficulty of choice.
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.
Strategy involves focus and, therefore, choice.
Whatever you think about this definition of leadership, a problem arises when it is confused with strategy.
One might conclude that if the audience for this verbiage is happy, why care? The enormous problem all this creates is that someone who actually wishes to conceive and implement an effective strategy is surrounded by empty rhetoric and bad examples. And the general public is either led astray or puts all such pronouncements into the same mental bin as late-night TV advertising.
Ascribing the success of Ford and Apple to a vision, shared at all levels, rather than pockets of outstanding competence mixed with luck, is a radical distortion of history.
Similarly, Ford’s “cars for everyman” vision was hardly unique and not necessarily shared by the five-dollar-a-day assembly line workers. Detroit was the “Silicon Valley” of 1907 and there were hundreds, even thousands, of engineers and tinkerers working on ways to make and sell automobiles. Ford’s special genius was in materials, industrial engineering, and promotion.
But I do know that believing that rays come out of your head and change the physical world, and that by thinking only of success you can become a success, are forms of psychosis and cannot be recommended as approaches to management or strategy.
Nevertheless, the doctrine that one can impose one’s visions and desires on the world by the force of thought alone retains a powerful appeal to many people. Its acceptance displaces critical thinking and good strategy.
Good strategy is coherent action backed up by an argument, an effective mixture of thought and action with a basic underlying structure I call the kernel.
The kernel of a strategy contains three elements:
- A diagnosis
- A guiding policy
- A set of coherent actions
Here are some examples: For a doctor, the challenge appears as a set of signs and symptoms together with a history. The doctor makes a clinical diagnosis, naming a disease or pathology. The therapeutic approach chosen is the doctor’s guiding policy. The doctor’s specific prescriptions for diet, therapy, and medication are the set of coherent actions to be taken.
A great deal of strategy work is trying to figure out what is going on.
Additionally, making the diagnosis an explicit element of the strategy allows the rest of the strategy to be revisited and changed as circumstances change.
Whereas a social scientist seeks a diagnosis that best predicts outcomes, good strategy tends to be based on the diagnosis promising leverage over outcomes.
Kennan’s containment and Gerstner’s drawing on all of IBM’s resources to solve customers’ problems are examples of guiding policies.
Good guiding policies are not goals or visions or images of desirable end states. Rather, they define a method of grappling with the situation and ruling out a vast array of possible actions.
Good strategy is not just “what” you are trying to do. It is also “why” and “how” you are doing it.
When I say strategy is “imposed,” I mean just that. It is an exercise in centralized power, used to overcome the natural workings of a system.
In very general terms, a good strategy works by harnessing power and applying it where it will have the greatest effect.
A good strategy draws power from focusing minds, energy, and action.
In competitive strategy, the key anticipations are often of buyer demand and competitive reactions.
The most critical anticipations are about the behavior of others, especially rivals.
Some of the most striking anticipations made in any modern business were created by Pierre Wack and Ted Newland of Group Planning at Shell International. I got to know Pierre Wack in 1980. He told me that “certain aspects of future events are predetermined: If there is a storm in the Himalayas, you can confidently predict that tomorrow, or the next day, there will be flooding in the Ganges plain.
Anticipation does not require psychic powers. In many circumstances, anticipation simply means considering the habits, preferences, and policies of others, as well as various inertias and constraints on change.
To achieve leverage, the strategist must have insight into a pivot point that will magnify the effects of focused energy and resources.
That is the power of concentration—of choosing an objective that can be decisively affected by the resources at hand.
One of a leader’s most powerful tools is the creation of a good proximate objective—one that is close enough at hand to be feasible.
The proximate objective is guided by forecasts of the future, but the more uncertain the future, the more its essential logic is that of “taking a strong position and creating options,” not of looking far ahead.
Then I asked the group to imagine that they were allowed to have only one objective. And the objective had to be feasible. What one single feasible objective, when accomplished, would make the biggest difference?
Despite all these cautions, I believe that if you are careful about the level of abstraction, you can take certain fundamental lessons from military history and be the wiser for doing so.
In the case at hand, Hannibal was certainly not briefed by a staff presenting four options arranged on a PowerPoint slide. Rather, he faced a challenge and he designed a novel response.
Today, as then, many effective strategies are more designs than decisions—are more constructed than chosen.
When someone says “Managers are decision makers,” they are not talking about master strategists, for a master strategist is a designer.
A design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation. Given a set bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions. Given a set level of challenge, higher-quality resources lessen the need for the tight integration of resources and actions.
A strategic resource is a kind of property that is fairly long lasting that has been constructed, developed over time, designed, or discovered by a company and that competitors cannot duplicate without suffering a net economic loss.
A high-quality strategic resource yielding a powerful competitive advantage makes for great strategic simplicity.
Good strategy is design, and design is about fitting various pieces together so they work as a coherent whole.
“Suppose Fortune magazine, Harvard Business School case writers, and stock analysts all say Crown’s strategy is a focus on hard-to-hold applications—carbonated beverages and aerosols. But also suppose that we are very stubborn. We want to do our own analysis. If you are serious about strategy work, you must always do your own analysis. A strategy is not necessarily what the CEO intended or what some executive says it is. Sometimes they are hiding the truth, sometimes they are misstating it, and sometimes they have taken a position as leader without really knowing the reasons for their company’s success.
“If we are not going to automatically accept the opinions of others, 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.
When faced with a question or problem to which there is no obvious answer, it is human nature to welcome the first seemingly reasonable answer that pops into mind, as if it were a life preserver in a choppy sea. The discipline of analysis is to not stop there, but to test that first insight against the evidence.
Using the diagrams for emphasis, I summarize what we have discovered. Crown and the majors are in the same industry but are playing by different rules. By concentrating on a carefully selected part of the market, Crown has not only specialized, it has increased its bargaining power with respect to its buyers. Thus, it captures a larger fraction of the value it creates. The majors, by contrast, have larger volumes of business but capture much lower fractions of the value they create. Thus, Crown crafted a competitive advantage in its target market. It isn’t the biggest can maker, but it makes the most money.
Here, the word “focus” has two meanings. First, it denotes the coordination of policies that produces extra power through their interacting and overlapping effects. Second, it denotes the application of that power to the right target.
But the truth is that many companies, especially large complex companies, don’t really have strategies. At the core, strategy is about focus, and most complex organizations don’t focus their resources. Instead, they pursue multiple goals at once, not concentrating enough resources to achieve a breakthrough in any of them.
As quoted earlier, when Avery took over at Crown he complained that “the company’s growth had slowed down.” It had. During the ten years (1980–89) before Avery become CEO at Crown, revenues grew at only 3.1 percent per year. However, it had nevertheless generated an annual average return to shareholders of 18.5 percent, enormously more than the 8.6 percent achieved by the S&P 500 during the same period. During the seventeen years after Connelly stepped down, from 1990 to 2006, the company grew rapidly, becoming the “leading” container maker in the world. But an owner of Crown’s common stock received a return of only 2.4 percent per year, much lower than the 9 percent provided by the S&P 500 Index.
Avery chose to grow the corporation by acquisition with an emphasis on the PET business, attracted by the growth in that industry. The problem was that he left the company’s traditional competitive advantage behind without replacing it.
He did not choose to understand the deeper meaning of focus—a concentration and coordination of action and resources that creates an advantage. Instead, he and CEO Avery were mesmerized by the prospects of expansion.
The proposition that growth itself creates value is so deeply entrenched in the rhetoric of business that it has become an article of almost unquestioned faith that growth is a good thing.
The problem with engineering growth by acquisition is that when you buy a company, especially a public company, you usually pay too much. You pay a premium over its ordinary market value—usually about 25 percent—plus fees. If you have friendly investment bankers and lenders, you can grow as fast as you like by acquisition. But unless you can buy companies for less than they are worth, or unless you are specially positioned to add more value to the target than anyone else can, no value is created by such expansion.
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.
advantage is rooted in differences—in the asymmetries among rivals. In real rivalry, there are an uncountable number of asymmetries. It is the leader’s job to identify which asymmetries are critical—which can be turned into important advantages.
The term “competitive advantage” became a term of art in business strategy with Michael Porter’s 1984 insightful book of that title. Indeed, Warren Buffett has said that he evaluates a company by looking for “sustainable competitive advantage.
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.
Claims in advertising or sales pitches that a particular IT system or product or training program will provide a competitive advantage are misusing the term since an “advantage” on sale to all comers is a contradiction in terms.
“By providing more value you avoid being a commodity. The bottled water field is crowded, but Lynda saw something unique in this product—water from a deep aquifer in Fiji that has been naturally filtered for several hundred years. Water that fell to earth before the industrial age, before pollution and chemicals. It is a unique proposition that the original owners had not exploited.
“To me, a business is ‘interesting’ when I can see ways to increase its value.
The conundrum disappears when you carefully distinguish between competitive advantage and financial gain—many have assumed that they are the same thing, but they are not.
For Stewart Resnick, and now for me, a competitive advantage is interesting when one has insights into ways to increase its value. That means there must be things you can do, on your own, to increase its value.
Although there are no ways (by definition) to alter the silver machine’s advantage, there are a myriad of ways to change eBay’s services, its efficiency, and the uses to which its resources and skills are put. So, eBay’s advantage is potentially interesting. It will become truly interesting when someone gains special insights into unexploited ways to expand the value of eBay’s already considerable competitive advantages.
Many strategy experts have equated competitive advantage with high profitability.
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.
A brand’s value comes from guaranteeing certain characteristics of the product.
One way to find fresh undefended high ground is by creating it yourself through pure innovation. Dramatic technical inventions, such as Gore-Tex, or business model innovations, such as FedEx’s overnight delivery system, create new high ground that may last for years before competitors appear at the ramparts.
The other way to grab the high ground—the way that is my focus here—is to exploit a wave of change.
When change occurs, most people focus on the main effects—the spurts in growth of new types of products and the falling demand for others. 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.
As changes begin to occur, the air will be full of comments about what is happening, but you must be able to dig beneath that surface and discover the fundamental forces at work.
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.
It is hard to show your skill as a sailor when there is no wind. Similarly, it is in moments of industry transition that skills at strategy are most valuable.
“This course is labeled ‘advanced’ because we don’t understand it very well.” He explained, “If there were a clear and consistent theory about what is going on here, we would call this course ‘elementary’ physics.
Fortunately, a leader does not need to get it totally right—the organization’s strategy merely has to be more right than those of its rivals.
If you can peer into the fog of change and see 10 percent more clearly than others see, then you may gain an edge.
The first guidepost demarks an industry transition induced by escalating fixed costs. The second calls out a transition created by deregulation. The third highlights predictable biases in forecasting. A fourth marks the need to properly assess incumbent response to change. And the fifth guidepost is the concept of an attractor state.
Inertia and entropy have several important implications for strategy:
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.
Organizational inertia generally falls into one of three categories: the inertia of routine, cultural inertia, and inertia by proxy.
We use the word “culture” to mark the elements of social behavior and meaning that are stable and strongly resist change.
The first step in breaking organizational culture inertia is simplification. This helps to eliminate the complex routines, processes, and hidden bargains among units that mask waste and inefficiency.
Follow the story of Nvidia and you will clearly see the kernel of a good strategy at work: diagnosis, guiding policy, and coherent action.
When a product gives a buyer an advantage in competition with others, there will be an especially rapid uptake of the product.
In creating strategy, it is often important to take on the viewpoints of others, seeing how the situation looks to a rival or to a customer.
Good strategy is built on functional knowledge about what works, what doesn’t, and why.
A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment. As results appear, good leaders learn more about what does and doesn’t work and adjust their strategies accordingly.
STRATEGY IS A HYPOTHESIS
Treating strategy like a problem in deduction assumes that anything worth knowing is already known—that only computation is required.
In science, a new idea or theory is called a hypothesis, a fancy word for a testable explanation for something that happens.
A strategy is, like a scientific hypothesis, an educated prediction of how the world works.
The ultimate worth of a strategy is determined by its success, not its acceptability to a council of philosophers or a board of editors.
Schultz formed a strategic hypothesis—the Italian espresso experience could be re-created in America and the public would embrace it.
Howard Schultz envisioned an Italian espresso bar in Seattle. He tested this hypothesis and found it wanting. But the test produced additional information, so he modified his hypothesis and retested. After hundreds of iterations, the original hypothesis has long since vanished, replaced by a myriad of new hypotheses, each covering some aspect of the growing, evolving business.
This process of learning—hypothesis, data, anomaly, new hypothesis, data, and so on—is called scientific induction and is a critical element of every successful business.
Starbucks did not vertically integrate to purposefully confuse the competition. It did so in order to be able to mutually adjust multiple elements of its business and to capture the information generated by each element of its business operations.
The kernel is a list reminding us that a good strategy has, at a minimum, three essential components: a diagnosis of the situation, the choice of an overall guiding policy, and the design of coherent action.
People normally think of strategy in terms of action—a strategy is what an organization does. But strategy also embodies an approach to overcoming some difficulty.
Identifying the difficulties and obstacles will give you a much clearer picture of the pattern of existing and possible 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.
Since guiding the development of the Macintosh computer, Jobs’s basic operating principles have become the stuff of legend: (1) imagine a product that is “insanely great,” (2) assemble a small team of the very best engineers and designers in the world, (3) make the product visually stunning and easy to use, pouring innovation into the user interface, (4) tell the world how cool and trendy the product is with innovative advertising.
Listening to Teece’s and Jobs’s imaginary counsel, I am reminded that good strategies are usually “corner solutions.” That is, they emphasize focus over compromise. They focus on one aspect of the situation, not trying to be all things to all people.
Good strategy grows out of an independent and careful assessment of the situation, harnessing individual insight to carefully crafted purpose.
Bad strategy follows the crowd, substituting popular slogans for insights.
Economies of scale have always played a central role in strategy thinking.
The introductory topic taught in any modern course on business strategy is the connection between industry structure and profit.
A quick summary is that a terrible industry looks like this: the product is an undifferentiated commodity; everyone has the same costs and access to the same technology; and buyers are price sensitive, knowledgeable, and willing to switch suppliers at a moment’s notice to get a better deal.
It has always been understood that stock prices reflect expectations about future profits. But the doctrine that stock prices are trustworthy, accurate estimators of future profits arose in the 1970s and was in full bloom by 1999.
Social herding presses us to think that everything is OK (or not OK) because everyone else is saying so.
The inside view presses us to ignore the lessons of other times and other places, believing that our company, our nation, our new venture, or our era is different.
It is important to push back against these biases.
You can do this by paying attention to real-world data that refutes the echo-chamber chanting of the crowd—and by learning the lessons taught by history and by other people in other places.