Good strategy is essentially the effective application of strength against weakness; strength applied either to your own organization’s weakness, to fix it, or to your rival’s weakness, to give you a competitive edge. Good strategy recognizes the true nature of challenges and finds ways to overcome them. Bad strategy leaves you blind to your organization’s challenges and chases unattainable goals without a workable plan.
Richard Rumelt is one of the world’s foremost thinkers on strategy, having guided organizations ranging from small, entrepreneurial start-ups to large, multinational conglomerates, as well as several governments and the U.S. Department of Defense. In Good Strategy Bad Strategy, he lays out the essential components of good strategy and the faulty thinking behind bad strategy. He also describes specific and measurable techniques for designing a strong, focused strategy that gives your organization the best chance of success.
To properly understand strategy, we must start by exploring two fundamental truths underpinning strong strategy:
Remarkably, simply having a strategy is a strategy. Most organizations operate reactively to challenges on a day-to-day basis, having only a fuzzy outline of long-term goals that they mistakenly call “strategy.” Thus, when an organization has a well-thought-out and specific strategy, it has an advantage over its competitors simply because it is better prepared for the challenges that face all rivals in an industry.
Apple’s turnaround under Steve Jobs in the late 1990s illustrates this advantage. By the time Jobs returned to the company as CEO in September 1997, Apple was losing market share to Microsoft and was heading for failure. Within a year, Jobs had turned the company around by cutting Apple back to a simplified, small, strong core and eliminating anything that didn’t serve that core. In doing so, he identified the fundamental problem of the company—it was unfocused—and then developed a coordinated set of actions to address that problem. He was able to turn the company around by instituting a clear, explicit strategy instead of merely, as his predecessor had done, trying a bit of this and a bit of that.
Above all else, good strategy leverages strength against weakness, especially, if possible, an unexpected strength against an unknown weakness, taking your competition by surprise. The success of Walmart illustrates this technique. In the 1970s and 1980s, Walmart was a small, regional store while the industry leader, KMart, was large, national, and well-established. Everyone saw KMart’s size and its decentralized structure as strengths, but Walmart recognized those traits as weaknesses, because they prevented the company from responding quickly to competitive challenges. When Walmart proved how efficient a centralized, networked hub controlling its various locations could be, KMart’s size and its ingrained individualized culture prevented it from reorganizing into a similarly networked structure. In 1990, Walmart surpassed KMart in size.
Now that we’ve explored a bit of what makes good strategy, let’s look at what makes bad strategy. Bad strategy is not simply the absence of any strategy, nor is it good strategy that has failed. Rather, it is poorly-thought-out strategy that’s based on misconceptions and misguided leadership.
There are four elements of bad strategy and three influences that cause it.
Bad strategy has four characteristics:
Now that we’ve defined bad strategy, let’s explore what causes people to create bad strategy. There are three primary reasons behind bad strategy:
At the core of good strategy lies a basic underlying structure that unites thought and action called the “kernel.” The kernel has three elements:
Let’s now look more closely into the specific things you can do to develop good strategy.
In the same way that a lever focuses all your strength onto a single, pivotal point, a good strategy focuses mental energy, resources, and actions onto a crucial objective that causes other objectives to fall into line. To properly leverage your strengths:
Ultimately, a good strategy identifies your strengths—in other words, your advantages—and then presses those advantages in one (or more) of four ways:
When planning your organization’s strategy, focus not only on your opponent’s weakness but also on your own. Think of your organization as a chain; the chain as a whole isn’t strong if it has an internal weakness—a weak link—that might one day break it. Examine your organization for such a weakness, and once you’ve identified it, focus on strengthening that.
It’s important to focus on any weaknesses you might have because strengthening already-strong links while neglecting weak ones will divert resources from where they’re needed most to an area that will not ultimately earn you a high return on investment. For example, between 1980 and 2008, General Motors (GM) invested much time and money into improving the quality of their already-well-built transmissions, but didn’t address problems like faulty dashboard knobs and rattling door panels. Improving the transmission did little to entice customers who cared about the shoddy quality elsewhere to buy GM cars.
Good strategy anticipates inertia—an organization’s resistance to change—and entropy—the way an organization tends to devolve into a state of chaos if it’s not actively managed.
Inertia can arise from the entrenchment of habits, policies, or an organization’s culture and beliefs. It can also arise when a company’s customers are slow to adapt to an industry change and the company doesn’t want to lose those immediate sales in order to chase future sales. For example, when customers are satisfied with low-interest-rate savings accounts even though prime interest rates have risen, a bank might be slow to offer higher rates knowing their own customers won’t complain. In doing so, the bank misses out on new business from customers who shop around for rates.
Entropy happens when an organization loses its edge because a lack of ongoing competition allows it to grow complacent. You can see entropy when a company produces a wide, unfocused range of products, when prices are set low to please the salesforce instead of because it’s the best competitive strategy, or when executive bonuses outpace the value of the company.
Inertia and entropy can pose great threats to an organization but also great opportunities. Sometimes, an organization’s biggest challenges are its own inertia (internal stasis) and entropy (inefficiency). However, an organization that takes advantage of other organizations’ inertia and entropy can leapfrog their success. Understanding these influences can help you avoid their possible negative effects and exploit their potential.
At its heart, good strategy is about focus: A leader must identify one or two critical issues facing her organization and then come up with a plan to direct actions and resources at these issues, to the exclusion of other, less-critical issues that might distract from this focus.
Often, this means that a company will narrow its target market down to a smaller segment or will pass up opportunities to provide additional services if those services dilute its focus. For example, Crown Cork & Seal, a metal can manufacturer, was more profitable than its larger, more established rivals because it targeted a niche market. Instead of supplying long-term production runs for the major beverage companies as its competitors did, Crown offered short-term, smaller runs that could be tailored for a customer’s specific needs, such as seasonal orders or unexpected demand surges. This tight focus allowed the company to control price negotiations more effectively and gave it better command of its operating logistics.
A good strategy recognizes the difference between organic, healthy growth and manufactured, unhealthy growth, and resists the temptation to grow just for the sake of growing. Healthy growth comes from a combination of growing demand and expanded capabilities. Unhealthy growth is forced through acquisitions that may not fit a company’s original strategic vision. Mergers don’t always produce the cost savings managers expect, and can result in loosely integrated, unfocused conglomerates that end in failure. For example, Crown Cork & Seal lost sight of its focus in the 1990s and went on an acquisition spree, which diluted their profits and drove their stock prices down.
A good strategy is a well-integrated, tight design made up of parts working together to form a coherent whole—like a car, which is more than the sum of its parts. Consider the needs of your organization when deciding how complex and highly integrated your strategy design will be. The greater the challenge facing an organization, the greater its need for a cleverly-designed strategy, but, in the face of lesser challenges, a less-highly-integrated design may be preferable. There are costs to highly efficient designs: namely, increased development difficulties, more supervision to implement, and less flexibility. For example, a race car has a much higher degree of design integration than a Honda CRV, but the race car is not appropriate for as many purposes as the Honda.
To position your organization so that competitors will have an uphill battle overtaking it, anticipate fundamental shifts in the landscape and exploit them before others do. Fundamental changes come from a variety of sources, including rising costs, deregulation, changes in technology, and changing buyer preferences. Predict how these changes will affect your industry or the wider landscape and look for opportunities that might be created. Look not only for direct effects of these changes but also for secondary effects, which may be equally profitable but less initially obvious.
For example, the advent of television in the 1950s brought free, accessible entertainment into peoples’ homes. Established film production companies had, until then, made money on a steady stream of mediocre movies, but competition from the free, in-home entertainment provided by television meant that by the 1960s, movie audiences had shrunk significantly. What ultimately revived the movie industry was a shift to independent films, where studios financed independent producers and directors to create higher-quality movies that would entice audiences into the theaters again. Thus, the rise of an independent film industry became a secondary effect of the technological change of television.
Additionally, when assessing change and predicting how it will play out, try to visualize the “ideal state” of an industry: the way an industry would work if it met the needs of customers as efficiently as possible. This will usually reveal the ultimate direction of an industry, as organizations generally evolve towards, not away from, efficiency, and buyers are innately drawn to solutions that meet their needs with the least amount of trouble.
Now that we’ve examined a variety of elements that go into the making of good strategy, let’s look at techniques and approaches you can use to incorporate these elements into your own strategic planning. There are three general guidelines you can adopt that will help clarify your thinking:
Use the scientific method to think like a scientist. This method involves a researcher testing a hypothesis—a prediction of how the world works—by observing if it holds up to experimentation in real life. A strategy is a type of hypothesis, and as strategists, we must measure its value by examining its success in practice.
Often, a hypothesis starts with “anomaly,” or something that grabs your attention because it represents a difference between what you observe and what you expect. In the world of science this might mean questioning why snow doesn’t melt as fast as you’d expect it to when the weather warms up (leading to the discovery of thermodynamics). In the business world, an anomaly might make you wonder why there are no upscale products offered by American fast-food companies (leading to Howard Schultz’s development of the coffeehouse chain, Starbucks). Recognizing an anomaly can lead you to unexpected opportunities that have been heretofore overlooked by competitors.
To think like an analyst, consciously and carefully examine your challenges and options. Some techniques you can use include:
Strategy failures are often the results of failures of thinking, and typically can be categorized into one (or more) of five common faulty biases:
Each of these biases leads us to ignore important information and aspects of a strategy that might lead to ruin. Be aware of these biases when you encounter them and prepare to push back against them. When you detect such biases in a group of people discussing and designing strategy, look for outside data that might refute such group-think.
Good strategy is the effective application of strength against weakness; strength applied either to your own organization’s weakness, to fix it, or to your rival’s weakness, to give you a competitive edge. Good strategy recognizes the true nature of challenges and finds ways to overcome them. Bad strategy leaves you blind to your organization’s challenges and chases unattainable goals without a workable plan. Unfortunately, many people misunderstand what makes good strategy and end up publishing vague statements of lofty but directionless goals instead of actionable, focused plans that will propel their organization to success.
Richard Rumelt is one of the world’s foremost thinkers on strategy, having guided organizations ranging from small, entrepreneurial start-ups to large, multinational conglomerates, as well as several governments and the U.S. Department of Defense. In Good Strategy Bad Strategy, he lays out the essential components of good strategy and the faulty thinking behind bad strategy. He also describes specific and measurable techniques for designing a strong, focused strategy that gives your organization the best chance of success.
We've reorganized the book’s chapter order for coherency. As a reference, here's how the summary chapters correspond to those of the book:
In this chapter, we’ll examine two primary truths about good strategy:
We’ll then examine the kernel at the heart of any good strategy, which has three elements:
The first truth about strategy is that remarkably, simply having a strategy is a strategy. Most organizations operate reactively to challenges on a day-to-day basis, having only a fuzzy outline of long-term goals that they mistakenly call “strategy.” Often, leaders find it difficult to articulate their organization’s strategy beyond vague plans like “make alliances” or “set strategic goals.”
Interestingly, leaders can often identify the strategy of their competitors more easily than their own. This is especially true if their competitors are market leaders. They can see that a window of opportunity opened and their competitors took advantage of it better than anyone else. They are thus able to recognize that good strategy means moving quickly to take strong positions in new opportunities, yet they don’t adopt this strategy themselves.
Thus, when an organization does have a well-thought-out and specific strategy, it has an advantage over its competitors simply because it is better prepared for the challenges that face all rivals in an industry. A company with coherent and coordinated plans and policies is positioned to take advantage of opportunities other companies may not have even been looking out for.
Apple’s turnaround when Steve Jobs returned to the company as CEO illustrates the advantage of having a strategy. By 1997, Apple was heading for collapse. The release of Microsoft’s Windows 95 operating system in 1995 had eaten up so much market share that then-CEO Gil Amelio was attempting to keep Apple alive by cutting staff, reorganizing the company’s many products, and adding unrelated internet services. He was floundering, in other words, for a coherent strategy and was instead just trying different things to see what might work. Industry watchers expected the company to be sold to IBM or to find their direction by specializing in a niche; for example, by investing in K-12 education.
Steve Jobs came back to the company as CEO in September 1997 when Apple was just two months from bankruptcy. Within a year he had turned the company around by instituting a basic, focused strategy: He cut Apple back to a simplified, small, strong core and eliminated anything that didn’t serve that core. In doing so, he identified the fundamental problem of the company—it was unfocused—and then developed a coordinated set of actions to address that problem:
Jobs was thus able to turn the company around by instituting a clear, explicit strategy instead of merely, as his predecessor had done, trying a bit of this and a bit of that. The company had the same resources before introducing a strategy as it did after, but the clear, focused direction the strategy provided proved the difference between success and failure.
The U.S. retaking of Kuwait in 1991 provides another great example of where having a strategy makes a difference. When the U.S. set out to retake Kuwait after it had been taken over by the Iraqi Republican Guard, everyone—including the news media, European nations, and Saddam Hussein’s forces—expected them to attack in a tried-and-true way of meeting the enemy head-on at the frontlines. Because Iraqi forces had been setting up their defenses for months, observers expected a strong resistance, and many expected the operation to take over a week and cost tens of thousands of American lives.
However, the commanding officer, General Norman Schwarzkopf, had a strategy. He openly stationed Marines in the south as if they were going to attack, but then maneuvered other troops surreptitiously up to the north through empty deserts so that they’d be positioned to attack from the back unexpectedly. The strategy was so successful that the ground war lasted just 100 hours. It was successful because its very existence was unexpected.
In this case, the advantage was that the strategy was unexpected by the competition, the Iraqi forces. The strategy itself wasn’t novel—in fact, it was publicly available as “Plan A” in military handbooks—but because the U.S. wasn’t expected to have any strategy other than the obvious “fight hard,” it was unexpected. Consequently, it led to quick victory.
The second truth about good strategy is that above all else, it leverages your strengths against your competitor’s weakness. In doing so, it is often most effective when it harnesses the element of surprise to leverage unexpected strengths against unknown weaknesses. When good strategy reveals strengths that were previously hidden, the competition does not have prepared defenses against them and the strengths are all the more effective.
For example, in the story of David versus Goliath, a shepherd boy faced a warrior in a fight to the death. They each had known strengths: Goliath was strong, experienced, and enormous; David was brave. David had known weaknesses: He was small and inexperienced in battle. Goliath had no known weaknesses. But David felled the giant with a well-aimed rock slingshotted at his forehead—the only part of his body unprotected by armor. David thus revealed a hidden strength in himself (his slingshot skills) as well as an overlooked weakness in his opponent (his unprotected forehead). Consequently, though the story is often told as an example of weakness over strength, it is better understood as an illustration of excellent strategy pitting specific unexpected strength against targeted unknown weakness.
(We’ll explore how you can leverage your strengths further in Chapter 3.)
The success of Walmart illustrates the power of finding and exploiting a rival’s hidden weakness with an unexpected strength of your own. In the 1970s and 1980s, Walmart was the David to retail’s Goliath: Kmart. Walmart had a known weakness (being small-scale) and KMart had known strengths (being large and well-established) that led industry watchers to assume that KMart’s dominance of the market would continue unimpeded. However, Walmart was able to identify two key weaknesses in their competitor that had not, until then, seemed like weaknesses:
While conventional retailing wisdom of the era said that decentralization added strength to a business thanks to the flexibility it could provide, Walmart broke with that wisdom by building a centralized network that anchored its various locations around a centralized hub. It recognized the hidden weakness of decentralization—the higher costs of uncoordinated efforts and the learning opportunities lost when data is not internally shared—and it built its stores to each be part of a larger whole, sharing distribution logistics, vendors, data, and policies. It essentially reimagined itself as one large company with many interrelated pieces, rather than many unrelated parts making up a larger conglomeration.
In doing so, Walmart exploited the fact that with its entrenched structure, KMart would not be able to quickly replicate a networked business model. To reap the benefits of a network, a company needs to adopt the entire structure; incorporating elements of it piecemeal won’t bring benefits, since the strength of a network lies in its ability to integrate all its various parts. Therefore, when KMart tried to adopt some of Walmart’s policies, it didn’t see the same results.
For example, both companies introduced point-of-sale barcodes around the same time. However, because Walmart’s codes fed into an integrated data system that helped determine inventory distribution, while KMart’s only eliminated the need to use physical price stickers, KMart’s barcodes didn’t add to the efficiency of their whole system in the same way that Walmart’s did.
The successful strategy of the U.S. military in managing the threat posed by the Soviet Union provides an excellent example of what can happen when you resist playing a game based on your opponent’s strength, and instead start framing your conflict around their overlooked weakness.
In the early 1970s, the Pentagon’s strategy of Soviet containment amounted to a pattern of buying weapons to counter perceived Soviet threats. This strategy centered on responding to Soviet strengths, and resulted in an unfocused cycle of reactive weapons purchases. It allowed the military to prepare for short-term challenges but didn’t provide a plan for handling the Soviet Union in the long run.
In 1976, a new strategy was developed that turned the previous thinking on its head by centering a plan of action around Soviet weaknesses. Its key insight was that the Soviets’ primary weakness was their limited budget. Exploiting this weakness by forcing the Soviets to spend more than they could sustainably afford would eventually lead to their downfall. Specifically, this meant investing in technologies that the Soviets would feel compelled to counter but were extremely expensive, and which would not significantly benefit Soviet offensive capabilities if they did counter them.
For example, the U.S. increased the accuracy of its missiles and the quietness of its submarines. The Soviets matched those capabilities, even though those developments didn’t particularly increase the threat to American lives. By 1990, as a result of these types of ongoing military expenditures, the USSR was going broke. It couldn’t keep up with increased American technological superiority, and it collapsed in 1991.
Thus, the American strategy was successful: Identify your relative advantage over your competition, then use it to impose outsized costs, which will make it difficult for them to compete with you.
At the core of good strategy lies a basic underlying structure that unites thought and action called the “kernel.” The kernel does not include convoluted language, visions, goals, or timelines. Instead, it has three elements:
Each of these elements is explored in the following sections.
A diagnosis asks, “What’s going on here?” It examines a challenging situation, looking for patterns, comparing it to past situations, and identifying which areas need the most attention. In doing so, a diagnosis aims to define the primary problem facing an organization.
It’s important to focus on just one or two primary problems; focusing on too many means spreading your resources thin. Do your best to judge which problem is the keystone problem—the one that will affect all the others—and start there.
Sometimes it’s hard to come up with a diagnosis. Problems are often ill-structured, that is, they are caused by a variety of different factors and it can be difficult to judge which of those is the most critical. Getting it wrong can send your strategy in the wrong direction. Sometimes different people will have different views on what the correct diagnosis of a problem is. The challenge for a leader is to see when an outsider’s diagnosis is incorrect and to look for a better diagnosis instead.
In 1993, IBM was in decline. Its strategy of offering complete and integrated computing solutions to companies and government agencies was losing ground to the increasingly fragmented landscape driven by microprocessors, and it couldn’t differentiate its desktop computers from the many competitors entering the market. The company needed a new strategy.
Though most industry watchers decided the problem was that the company was too integrated, and thus the solution was to break it up and sell off various pieces, the new CEO, Lou Gerstner, disagreed. He decided that the problem was not that the company was too integrated but that it was failing to take full advantage of the opportunities such integration offered: The primary challenge was a lack of internal coordination.
This new diagnosis was not a strategy in and of itself, but it allowed the company to develop a new guiding policy leveraging the fact that IBM was uniquely integrated and could offer broad computing solutions rather than hardware platforms.
A guiding policy is a clearly outlined approach to coping with the challenges identified by the diagnosis. It focuses an organization’s particular advantages toward targeted objectives to meet those challenges, steering the organization away from tangential or ineffective actions. In the example above with IBM, this meant leveraging its position as a uniquely integrated company.
An excellent example of good guiding policy is Wells Fargo’s. The company’s corporate vision aims to satisfy all of its customers’ financial needs. It supports this ambitious goal with a specific guiding policy of cross-selling to take advantage of network effects. The guiding policy fosters loyalty among its customers by providing them with a wide range of financial products, which helps to achieve the company’s overarching goal.
Many people develop a diagnosis and a guiding policy and stop there, thinking their strategic plan is complete. But the kernel also needs a focused action plan to harness organizational energy.
An action plan coordinates a variety of operations to carry out the guiding policy, defining resources, policies, and movements that support one another. For example, a company with a simple and clear competitive advantage like, say, being a low-cost retailer, will have interrelated policies affecting sales, marketing, distribution, and design that will mutually support each other in order to keep prices low.
When action plans are not coherent, it’s because they either have internal conflicts or they are pursuing too many challenges. An example of an action plan with internal conflicts was when Ford purchased a number of high-end automotive brands, including Jaguar and Volvo. Ford’s overall guiding policy for the company in general was “economies of scale,” meaning their action plans centered around large, bulk purchases and manufacturing processes that could be shared among brands. However, the top-shelf brands they acquired each needed different action plans, and the company had trouble incorporating the new business units into their existing model. Jaguar owners didn’t want “snazzy Volvos” and Volvo buyers didn’t want “safer Jaguars.” The sets of conflicting action plans needed proved unresolvable, and Ford ended up selling off its luxury car brands in the 2000s.
Action plans are centralized; they are coordinated plans overseen by upper management that guide all divisions and departments within an organization. Sometimes people object to the centralized nature of action plans. After all, decentralization has been proven effective in many situations. For example, sometimes decentralization allows a company to respond to local customer preferences to maximize profits, such as 7-Eleven, which tailors its beverage offerings regionally.
However, centralization has advantages over decentralization. When the costs or benefits of certain decisions are shouldered unevenly among departments, only a centralized set of directives can ensure that everyone signs on. Sometimes, too, the benefits of a strategy will only accrue if the strategy is executed wholesale. This recalls our earlier example of Walmart versus KMart, where the benefits of, say, the point-of-sale barcodes only happened when the company had a fully-developed data-support network behind it. A coherent action plan that integrates all policies ensures full uptake of a strategy across all divisions and departments, giving it the best chance of success.
Good strategy is often most effective when it reveals unexpected strengths in your own organization and unknown weaknesses in your competition, and pits the first against the second.
What are your organization’s obvious strengths (the ones that are easily identified to outside observers, or the ones you might list in a company description)? What are some hidden strengths of your organization? (Think about strengths that insiders would notice more easily than outsiders—for instance, logistical efficiencies or unique policies that might give you an edge over your competitors.)
What are your rival’s obvious weaknesses? What might be some hidden weaknesses in your competitors? (Consider policies and organizational structures that might be outdated or technology that they’re not taking advantage of.)
In what ways might you be able to use any of your strengths listed above, either known or hidden, against any of your rivals’ weaknesses listed above?
Now that we’ve explored a bit of what makes good strategy, let’s look at what makes bad strategy. In this chapter, we’ll examine four elements that can create misguided strategy:
We’ll also look at some forces driving the creation of so much bad strategy today, focusing on three causes:
Bad strategy is not simply the absence of any strategy, nor is it good strategy that has failed. Rather, it is poorly-thought-out strategy that’s based on misconceptions and misguided leadership.
There’s a lot of bad strategy out there, in the private sector as well as the public. The effects of bad strategy can be seen in everything from the failures of corporations to the poor performance of our educational system.
There are four major elements of bad strategy:
When a corporation uses fancy phrasing to describe their grand vision or performance goals, they often call it strategy. It’s not. It’s “fluff.”
At its core, “fluff” is the statement of an obvious fact sprinkled with industry buzzwords. Because of its lofty vocabulary and convoluted sentence structure, fluff is often mistaken for intelligent expertise, but only authentic analysis makes a complex issue understandable. Fluff works in the opposite direction, injecting complexity into simple concepts to cover up a lack of insight, original thought, or useful directives.
For example, a bank might say their core strategy is “customer-focused intermediation.” Here, “intermediation” merely means being the middleman between customer transactions, and “customer-focused” simply means working with customers. Replacing the buzzwords gives you a simplified statement: “Our bank’s strategy is to be a bank.” There’s nothing useful there that shows how this particular bank is going to set itself apart from the competition.
Fluff often shows up in the information technology industry; an EU report talked of “cloud computing” as “an elastic execution environment of resources involving multiple stakeholders and providing a metered service at multiple granularities for a specified level of quality-of-service.” Taking out the buzzwords, this translates to “a group of servers providing a range of services.” It’s a meaningless, vague, and general description; not an actionable strategy.
The fall of accounting firm Arthur Anderson shows the danger of using fluffy industry-speak to obscure a lack of solid foundations.
In 2000, Arthur Anderson was helping the energy-trading and utilities company Enron enter the bandwidth-trading markets. This was a fundamentally different market from Enron’s previous areas of expertise—the gas and electric markets, through which it had access to information on supplies and demand that gave it a competitive advantage over other traders.
In moving into bandwidth-trading, all of Enron’s expertise and competitive advantages disappeared. Bandwidth was not quantifiable nor deliverable in the same way gas and electricity were. Enron was not the central player in the market and so had less access to critical data. Further, the bandwidth market was fundamentally different than gas and electricity markets because capacity and demand followed different rules, which Enron’s lack of expertise in the market blinded them to.
Instead of acknowledging and addressing these challenges, Arthur Anderson flooded its own corporate communications with fluffy visuals and statements with industry words like “market enablers,” “over-the-counter broker,” and “electronic trading platform,” which were merely ostentatious ways of saying that they would help Enron function as a trader. Arthur Anderson enticed investors to sink their money into this unproven business, covering up their lack of knowledge with overblown vocabulary.
By the time Enron filed for bankruptcy protection in December 2001, it was clear that Arthur Anderson had not actually understood or devised a viable strategy for the bandwidth market, and had relied on industry-speak, given credence by their reputation, to mask their lack of knowledge.
The second way strategies typically fail is that they don’t properly identify the core challenges an organization faces so that these challenges can be planned for. If a problem is not well defined, you can’t devise a workable solution to it. Further, you can’t distinguish a good strategy from a bad one if you don’t know what obstacle it aims to overcome, and you therefore will be more susceptible to choosing a bad one unwittingly.
The fall of International Harvester (IH) is an example of what can happen when a company fails to identify the one core challenge that is more critical than all the others.
IH was once one of the largest corporations in the United States. However, by the late 1970s it was a sleepy outfit with declining profits. In 1979, in an attempt to turn the company around, it published a dense, lengthy new corporate strategy. The plan consisted of five separate plans, one from each of the company’s divisions—truck making, gas turbines, components, agricultural equipment, and industrial equipment.
The plan was detailed but failed to identify the primary challenge facing the company: an inefficient work structure. IH’s profit margins were close to one-half those of their competitors at the time because its organization encouraged ill-thought-out and frequent transfers of personnel. Further, the company had one of the worst labor relations in the industry, which increased costs.
Because its plans to invest in new equipment and cut administrative overhead did nothing to address its actual main challenge, the company was unable to halt its decline. Though profits improved for a couple of years after the implementation of the new strategy, a poorly-resolved labor dispute left IH hobbled and by 1985, it had lost over three billion dollars and been forced to lay off 85 percent of its workforce. It was finally broken up and with the exception of one trucking division, it was sold piecemeal.
In contrast to the failure of IH, the success of the Defense Advanced Research Projects Agency (DARPA) illustrates what can happen when an organization adopts a strategy that places its primary challenge front and center.
DARPA’s stated challenge is to find technological solutions for military problems. They note that this challenge has two sub-challenges: First, some problems have unclear solutions, and second, some solutions may not ultimately work, so there is risk inherent in developing them.
They focus their efforts and resources on projects the military avoids because they are too difficult and have uncertain returns on investment. Some of DARPA’s successes include ballistic missile defense, the first iteration of the Internet, stealth technology, GPS, and unmanned land and air vehicles.
DARPA’s strategy has been successful because it starts with a clear identification of their primary challenge and then concentrates its actions and resources on that challenge. It is focused; it doesn’t try to address all military problems but only the ones that fall into their space, and it doesn’t spread its resources thinly between internal interests. Likewise, the strategy is specific—it defines policies that drive its daily operations. It is devoid of fluff.
The third way strategies fail is that they don’t identify actual strategies, but instead name performance goals—five-year budgets paired with market share projections, for instance. For example, a company might outline a plan to increase revenues by twenty percent, become the industry leader, or increase customer retention by ten percent. These are goals, not actionable strategies.
A company might also decide that stronger motivation is their strategic game plan, as if a failure to want these goals is all that’s standing in the way of achieving them. It might then speak of a “culture of commitment” or “dedication to achievement,” which are great big-picture values, but are not strategies.
Strategy based on goals and motivation misses the insight that competition is about more than just strengths and wills; it is about judgment and aptitude. When you mistake goals for strategies and motivation for a plan, you can end up on a dead-end path hoping that if you just hang in there long enough, things will start to go your way. Organizations who mistake motivation for a strategy usually adopt a “never give up” attitude that compels them to commit to a losing position even when the data says they should adjust their aims or actions.
A tragic example of this goal-based, motivation-driven strategy underpinned by a “hang in there, don’t ever give up, just keep trying harder” mentality was the slaughter of Allied troops during the First World War outside the Belgian village of Passchendaele.
In 1917, British general Douglas Haig decided to break through German lines in that region to open up a path to the sea. He envisioned that this would divide and weaken the German army. His advisors told him that shelling German fortifications would destroy the Belgian dikes and submerge the area in seawater. Ignoring their advice, he bombed the fortifications anyway and destroyed the dikes. The resultant flooding turned the entire area into a morass of sticky clay that swallowed men to their waists and drowned tanks, horses, and the wounded.
Though Haig had, prior to the battle, promised to call off the attack if it didn’t go their way, once his operation was underway he refused to back down, committed to the idea that “one last push” might turn the tide in his favor. After three months, more than 70,000 Allied soldiers had died in the attack and another 250,000 were wounded—and only five miles of ground had been gained.
In this tragedy, the Allied forces did not suffer from a lack of motivation or perseverance; they suffered from a lack of a strategic game plan that would either make their efforts worthwhile or cause them to redirect.
A fourth way strategies can fail is by choosing misguided objectives. Objectives are different from goals. Goals are broad, big-picture visions. Objectives are subgoals: specific approaches that will allow an organization to accomplish those larger goals. Strategy is the road map linking objectives to goals.
For example, the United States’ goals may be freedom, peace, security, and justice. Its objectives may then be to defeat the Taliban and establish a working government in Afghanistan. These objectives will form its strategy.
Sometimes, leaders don’t choose their objectives wisely. There are two common mistakes leader make when defining objectives:
The journey of the organic food distributors Chen Brothers illustrates the proper way to use strategic objectives to accomplish goals. The company outlined specific, focused objectives and shifted them as needed in response to short-term challenges in order to achieve long-term success.
Chen Brothers was a specialty food distributor that aimed to increase profit and become the leading distributor for organic products. The company didn’t fall into the trap of thinking these overall goals were a strategy; instead, it developed a very specific set of objectives to accomplish them. These objectives targeted local specialty retailers with well-thought-out sales and marketing methods.
With the rise of Whole Foods, though, the market changed. Chen Brothers adjusted accordingly. They didn’t adjust their goals—they still aimed to be market leaders in organic food distribution—but they adjusted their objectives, and thus their strategy. Instead of targeting a hodge-podge collection of local retailers, they set their sights exclusively on Whole Foods and developed a plan to unite local food producers under a common label that could be sold at the national chain.
In this way, the company successfully focused its energy and resources on one or two important short-term objectives that would position it to accomplish its long-term goals. Once those objectives were met, it was able to adopt new objectives, ones targeting, for example, shelf space and market share.
In contrast, the difficulties of the Los Angeles Unified School District (LAUSD) illustrate what happens when a leader doesn’t choose objectives wisely.
In 2006, David Brewer took over LAUSD as superintendent with the directive to improve its educational performance. Brewer started off well by narrowing his focus to just the 34 lowest-performing schools in the district.
However, the objectives he chose to pursue in regards to those schools fell into the “all ambition, no direction” trap. He set goals such as creating “transformational leaders” but didn’t define what this meant or provide guidance on how to become such leaders. Likewise, he ignored the fact that teachers and administrators were stretched to capacity just keeping up with daily problems and had no decision-making power anyway within the highly regulated bureaucracy of the system. He also initiated a volunteer-parent-led community outreach program at each school, a hugely unrealistic ambition given that much of the underperformance of the students was due to poverty and the unstable family lives that often resulted from this.
Now that we’ve defined bad strategy, let’s explore why there’s so much of it around, and why people don’t generally develop good strategy when tasked to.
There are three primary reasons behind bad strategy:
These three points are discussed below.
One of the main drivers of bad strategy is an inability to prioritize interests. Often, complex organizations like corporations or governments are too concerned with placating the various and diverse interests within their operations to develop a focused, targeted strategy that concentrates resources into one specialty. It can be unpleasant to make hard choices that favor one coalition over another, and therefore, large, successful organizations can end up with a hodgepodge of conflicting goals and interests among their various parts. When they try to accommodate all of these conflicting interests by spreading resources evenly around, they end up with unfocused, bad strategy. To create good strategy, leaders must be willing to say no to these varying interests.
Making choices is difficult because it means that some people and departments within the organization will be worse off, and therefore will resist such decisions. Making such choices gets even more difficult when a company is more established; the longer certain interests have been allowed to assert themselves, the more entitled they feel to their participation.
In the case study we looked at earlier of the U.S. Desert Storm operation, it’s worth noting that one of the main reasons Schwarzkopf’s strategy worked is that he ignored pressures from various parts of his organization who wanted to play bigger roles in the offensive. For example, sea-based Marines wanted to fight but he told them to simply station themselves off the coast as a decoy, the Air Force wanted to participate with strategic bombing but he forbade them to, and the Secretary of Defense (Dick Cheney) wanted to implement a different action plan but Schwarzkopf refused. Resisting the pull of these internal factions allowed him to maintain a focused, clear strategy.
The fate of Digital Equipment Corporation (DEC) shows the danger of allowing competing priorities to assert themselves equally.
In the early 1990s, DEC, once a computing pioneer, found itself losing market share to newer technologies. The company set out to update their corporate strategy to deal with the shifting landscape.
Three primary priorities were proposed, each backed by a different executive. The first advocated for continuing as a physical computer company, integrating hardware and software into usable packages. The second argued for a more customer-service oriented approach, offering business solutions to computing difficulties. The third believed the future lay in semiconductor technologies, and that the company should focus its resources in chip development.
Each objective had strengths and each had drawbacks, and the executives could not come to a consensus. Finally, they produced a strategy stating that DEC would be committed to “providing high-quality products and services” and they would be “a leader in data processing.” It was a fluffy, vague statement of goals that avoided naming any one particular aim—it was not a strategy. By the time the company decided that developing chips was the way to go, the window of opportunity had passed. DEC was acquired by Compaq in 1998.
Another source of bad strategy is the lure of template-style fill-in-the-blank strategy that promises easy solutions without much thinking. This type of strategic planning grew out of the business world’s obsession with charismatic leaders.
In the mid-1980s, business thinkers noted that transformational leaders can have an outsized impact on a company’s future, and then mistakenly conflated strong, charismatic leadership with strategy. This gave rise to the false belief, held by many organizations, that if they had a strong leader, they had a good strategy.
In chasing this myth, management experts tried to boil leadership down to a formula with three elements. According to this theory, a good leader:
While this may be a good way to develop strong leadership, it does not address strategy. Leadership may be about vision, but strategy is about figuring out the specifics of how to accomplish that vision.
The leadership template and its assumed connection to strategy gave rise to a related template designed to capture the essence of a company’s strategy in a fill-in-the-blank sort of way. You’ll often see it in a business plan or annual report. Unfortunately, these templates encourage vague statements of goals and ambitions, rather than clear analysis of challenges and solutions. You’ll typically see sections for the following prompts:
The end result of this type of strategy formation, which is used enthusiastically by corporations, schools, and government agencies, is a list of buzzword-filled goals-as-strategies; statements of the obvious with no actual plan. For example, the mission statement of one well-known New York State private university is to be “a learning community that seeks to [educate] leaders of tomorrow.” In other words, it seeks to be a university, with no greater specificity than that.
Because these strategic development tools are so popular, they show up in many corporate plans, leaving a person who wants to develop a better strategy with limited models to emulate.
The obsession with charismatic leaders has contributed to bad strategy development in another way, too: the fascination with the idea of positive thinking.
Many organizational leaders develop “strategy” that is, at its core, nothing more than grandiose visions of success paired with motivational, can-do language. Often this is because popular cultural notions of fantastically visionary leaders have led people to believe that positive thinking is the most powerful tool a leader can wield. Belief in this myth blocks out more focused, critical thinking and sets up companies for failure. Centering your strategy around “wishful thinking” can only result in directionless plans with little useful guidance.
The “power of positive thinking” movement has its roots in American religious doctrines and transcendental writings from the 1800s, in which philosophers like Ralph Waldo Emerson as well as Protestant theologians proposed the idea that individuals have a “divine spark” inside of them that allows them to understand great visions. By the late 1800s, this line of thinking had evolved to argue that the power of thought can affect the physical world: thinking about success can bring about success, and thinking about failure can bring about failure. This was called the “New Thought” movement.
Since then—throughout the twentieth century and right up until today—motivational writers have encouraged people to apply these kinds of philosophies to their business plans, reasoning that through the “law of attraction,” they will draw good things to themselves and their companies simply by thinking about good things.
Unfortunately, in advancing such theories, management advisors extoll the visions of an organization’s leaders but ignore any other elements that go into the company’s success, as if the only important element of strategy is wanting success strongly enough. For example, Steve Jobs is often lauded for his visionary thinking, but ambition had less of an impact on Apple’s success than did competence and a specific competitive advantage: the technological development that allowed the Apple II to directly connect to the floppy disk rather than using expensive controllers.
We’ve now explored what makes good strategy as well as what makes bad strategy. In the following chapters, we’ll look more closely into the specific things you can do to develop good strategy. These include:
We’ll then look at Nvidia’s strategy as a case study of how to successfully put all of these actions together.
When crafting good strategy, start by identifying your strengths and figuring out how you can use them to increase your competitive advantages. You can do this by leveraging your strengths onto one pivot point, and by pressing your advantages by increasing them, broadening their influence, or increasing demand for them. These concepts are explored further below.
One way to develop good strategy is to look for how you can leverage your strengths. In the same way that a lever focuses force onto a single, pivotal point, a good strategy focuses mental energy, resources, and actions onto one crucial objective that causes other objectives to fall into line. In the same way that knocking loose one particular keystone can cause a giant arch to fall, leverage applies pressure to one specific area that will have an outsized effect on other areas. Finding that pivotal area is the trick to forming good strategy.
A real-life example of this is when Bill Gates developed an operating system for IBM in 1980 but negotiated the rights to sell the software to third parties afterward. This aspect of his contract gave him leverage he used to propel Microsoft to success.
Strategic leverage comes from three insights:
Each of these insights is explored in the following sections.
Finding leverage—in other words, the place where you should focus all your efforts—starts with figuring out what’s likely to happen in the future. This means predicting the behaviors of your customers or your rivals in response to events, taking into consideration their habits, preferences, and policies, and directing your efforts accordingly. For corporate strategy, this often means predicting consumer buying habits and the resulting competitor reactions.
An excellent example of successful corporate prediction is Toyota’s billion-dollar investment in the development of hybrid gas-electric engines. Their strategy was prompted by two predictions: First, rising fuel prices would eventually spark consumer demand for hybrid vehicles (consumer buying habits), and second, to respond to this rising demand, rival carmakers would prefer to license Toyota’s technology rather than develop their own (competitor reactions).
For governmental strategy, this means predicting, for example, what a rival military will do. We’ve already discussed a successful military venture, in Desert Storm, where Schwartkopf correctly predicted the movements of the Iraqi army; an example of an unsuccessful governmental prediction is the later experiences of the U.S. military in Iraq after the overthrow of Saddam Hussein, when they failed to anticipate the vigorous insurgency that arose.
A good strategy can only harness leverage if it can identify the pivot points where it should apply force. Pivot points are opportunities where focused energy will be magnified. They are usually imbalances in a situation—in other words, an area where one rival has an outsized advantage over another in capability, resources, or insight.
7-Eleven’s Japanese arm provides a great example of how to properly leverage pivot points. The company found that consumers had tastes that varied widely from region to region and that customers loved newness and variety. To take advantage of those specific aspects of their consumer market, they developed strategies to offer dozens of soft drink flavor options in each store and to change out many of the flavors each week: pivot points that set them apart from their competition.
A good strategy then coordinates an organization’s efforts in order to concentrate them on those pivot points.
There are three reasons to concentrate your organization’s efforts. First, you have limited resources—money, products, time, and mental energy—and coordinating them towards one goal will have a more significant effect than spreading them thinly.
Second, a concentration of many efforts into one area can have a much larger impact than the impact of many efforts focused on different areas: In other words, the sum impact will be greater than its parts. This is called the “threshold effect.” It means that sometimes, your efforts will produce no results until they exceed a particular threshold, but once you pass that threshold, your efforts will produce benefits. Therefore, you should focus lots of effort on one area, to ensure you pass that area’s “threshold” and start reaping benefits, rather than focusing minimal effort on lots of areas, and never passing any thresholds.
The advertising industry is an example of a field highly influenced by the threshold effect. A company spending a small amount on advertising will typically see no benefit. It has to spend a lot on advertising to start earning the public recognition that will bring it benefits from an ad campaign—new customers, for example. For this reason, many companies adopt action plans in which they concentrate their ad efforts; for example, they’ll saturate the airwaves over short periods of time rather than space their ads out more evenly. Outside of advertising, companies often effectively concentrate efforts when they seek out customers in a small, targeted market segment rather than seeking out the same number of customers spread over a larger market.
Third, from a psychological perspective, it feels better to the people tasked with solving problems—and looks better to outsiders observing—to see one project completed very well rather than several projects completed somewhat well. This perception can bring additional benefits: By coming across as very successful, even in a smaller area, people assume you can be successful in larger areas and will more readily give you the opportunity to try—they might invest in your project or allow you to expand its scope. For example, vastly improving two schools in a region can have a stronger impact on public opinion than improving two hundred schools in that region but by only three percent each. The focused, outsized success makes the improvement program look more promising, and it’s more likely to be used for additional schools.
Ultimately, a good strategy identifies where your strengths—your advantages—can be applied to your opponent’s weaknesses.
Competitive advantages are born of asymmetries: differences between rivals, meaning one company does something better than the other. A leader’s job is to identify which of these asymmetries are critical. Then, a leader must press these critical strengths while remaining aware of her rival’s critical strengths so that she can sidestep them.
Problems arise when leaders respond defensively to their competitor’s strengths rather than offensively to their competitor’s weaknesses. For example, after 9/11, the U.S. was drawn into a protracted simmering conflict that played to its opponent’s (the Taliban’s) strengths: patience and less political sensitivity to ongoing casualties. It was unable to capitalize on its own strengths—its superior military capabilities—because it allowed its opposition to set the terms of the engagement: that the side with the least sensitivity to casualties can outlast the other.
Long-term success relies on having a sustained competitive advantage. This phrase has two parts: competitive and sustained. As discussed above, an advantage is competitive when you do something better than your rivals. An advantage is sustained when your competitors cannot replicate it. This usually occurs because they cannot replicate the resources underpinning it. For example, a solid patent, a long-standing reputation for quality, or an outsized economy of scale will all give a company an advantage that is hard for a rival to overcome.
Sustaining your competitive advantage often means adjusting it or finding new ways to apply it as your industry evolves. A competitive advantage is only financially valuable if a leader can figure out how to increase its value against changing market conditions. A company with a competitive advantage that doesn’t change with the changing business landscape might end up trundling along slightly profitable but never realizing the full potential of its competitive edge.
For example, eBay has a competitive advantage as a platform providing the most efficient way to buy or sell a personal item online, and it has a broad customer base, a state-of-the-art payment system, and a rating system that sets it apart from competitors. However, its market value has steadily declined for many years. The company must figure out a way to harness and leverage its competitive advantage in order to create financial value from it.
There are four ways a company can try to press its competitive advantage in response to changing conditions. It can:
We'll cover each approach in more detail.
One way to define an advantage is the difference between what it costs you to produce a product or provide a service and how much a customer values that product or service. Increasing an advantage means either reducing its costs or increasing its value to customers, or both. To reduce costs, examine every aspect of how your operations work and reevaluate processes you might be taking for granted. To increase customer value, study your customers and develop empathy for them that allows you to understand their attitudes, values, and desires.
An example of finding novel ways to decrease costs through keen observation is when Frank Gilbreth revolutionized the process of bricklaying in the early 1900s. Bricklayers had, for centuries, worked in the same way, but Gilbreth carefully studied the process and realized he could more than double productivity by simply adjusting some of the procedures: placing brick pallets closer to chest-height and improving mortar consistency. In doing so, he decreased his production costs (the time needed to lay bricks) and accordingly, his competitive advantage increased.
Broadening an advantage means applying it to new fields and new competitors. To successfully do this you must focus on what skills and resources underpin a particular advantage, instead of the specific products, buyers, and competitors that are linked to it.
It’s important to focus on skills and resources because if a company thinks of itself in terms of a product instead of in terms of the skills it uses to bring that product to market, it might expand into fields it knows nothing about because the skills required for success are different. For example, in the above case study of Crown Cork & Seal, when they eventually expanded into plastics, they did so because they pinned their advantage as a producer of containers rather than their true advantage as a producer of high-end, tailored production runs.
An example of a company effectively broadening its advantage is DuPont, which started as an explosives company and leveraged its expertise in chemistry (its skill set) to ultimately manufacture plastics and other synthetics for household consumer use. Instead of simply chasing the explosives industry, they looked at what other uses they could put their skills to.
Another way you can press your advantage is to increase demand for your product or service. There are two ways to increase demand: either increase the number of buyers or increase the amount each buyer demands. Then, you must be sure that you are positioned to take advantage of this new demand in a way that your competitors are not.
An excellent example of this process comes from the previously mentioned Roll International. In addition to nuts and citrus, the company also invested in pomegranate orchards and created the POM Wonderful company. When it planted its orchards, pomegranates were a somewhat exotic fruit with a small market. In fact, Roll’s investment alone increased U.S. production of pomegranates sixfold. However, the company saw potential where no one else had, and it implemented an aggressive marketing campaign to educate consumers on the health benefits of pomegranate juice. By the time the crop was ready for market, the company had created a new beverage category to receive it.
One more way you can press your advantage is to limit your competition’s ability to replicate it. Companies do this all the time when they extend patents and defend trademarks, leveraging legal protections to limit competition.
Companies also do this by constantly innovating, making their products or services into moving targets that are difficult for competitors to duplicate before they’ve improved again. For example, Microsoft is constantly upgrading and evolving its Windows operating system, consistently raising the bar for any potential imitators.
Roll International is an excellent example of how to effectively press your advantages and maintain a sustained competitive advantage. It became a leading agricultural producer by using its size as leverage to create a competitive edge that rivals couldn’t match.
Founders Stewart and Lynda Resnick began to invest in agribusiness in the 1980s with citrus and nuts. They purchased enough land to take advantage of economies of scale and then, to press that advantage, they began a marketing campaign extolling the health benefits of their products, essentially creating demand for them where there had been little. Although growth in demand would benefit all nut and pomegranate farmers, since Roll was the largest producer, it reaped the most benefits. The company was also able to leverage economies of scale because of its size, which it used to more efficiently process and package its goods.
Because agriculture is an industry that inherently changes slowly, limited by the growth of orchards, Roll was able to get ahead of competitors by positioning itself to benefit from this anticipated demand before its competitors became aware of its potential. For its competitors to catch up, they’d have to purchase new land and plant new orchards, as well as invest in processing facilities, marketing, packaging, and distribution. Because Roll had an early start and an asymmetrical (larger) size, the company had a competitive advantage that its competitors could not replicate. Today it is an industry-leading grower of citrus and nuts.
When crafting good strategy, you must not only focus on your strengths, but you must also be aware of your weaknesses. These weaknesses might be a weak link in your operations (a department that’s not functioning properly or a product that’s bleeding profits) or it may be the development of organizational inertia or entropy (stasis or disorganization). This chapter will explore these ideas further.
When planning your organization’s strategy, focus not only on your opponent’s weakness but also on your own. Think of your organization as a chain; the chain as a whole isn’t strong if it has an internal weakness—a weak link—that might one day break it. Examine your organization for such a weakness, and once you’ve identified it, focus on strengthening that.
If you don’t focus on your weakness, not only will you leave yourself vulnerable to future failure, but additionally, focusing resources on already-strong areas may actually make your organization weaker. Strengthening already-strong links while neglecting weak ones will divert resources from where they’re needed most to an area that will not ultimately earn you a high return on investment: Adding strength to existing strength will bring about a smaller gain than adding strength to weakness. If you pursue this course of action, not only will your company become less efficient, but you will also incur opportunity costs: lost time or lost customers who were put off by the continued problems that you didn’t address.
Sometimes, a leader is faced with multiple points of weakness. In this situation, focus first on the areas that must be addressed in order to fix the other areas. This may sound obvious, but often, leaders try to fix all problems simultaneously and then run into trouble. For example, increasing your sales force will not turn around your company if you don’t first fix the underperforming equipment you’re selling.
For example, between 1980 and 2008, General Motors (GM) invested much time and money into improving the quality of their already-well-built transmissions, but didn’t address problems like faulty dashboard knobs and rattling door panels. Improving the transmission did little to entice customers who cared about shoddy quality elsewhere to buy GM cars.
Conversely, a well-managed chain can give you an insurmountable competitive advantage. When a company operates through a chain in which each link is strong and each is fully integrated with the other links, that company can dominate its market because of the simple fact that it is difficult for competitors to replicate such highly efficient chains.
Consider IKEA, the Swedish store that designs and sells ready-to-assemble furniture. Its success lies in its many coordinated policies: Its catalogues replace a sales force, its disassembled products reduce its warehouse and shipping needs, its customers help themselves to its products and thereby simplify its distribution, and because it designs its own products, it can better manage its logistics. These policies are well-known, but replicating one element without the others—one link without the rest of the chain—can’t propel a competitor to the same kind of success as IKEA.
A leader’s insight, and her choices of where to focus her resources, can be the difference between a poorly-managed chain (like GM’s during those decades) or a well-managed chain (like IKEA’s).
We’ll now look at two aspects of a company—inertia and entropy—that in large part determine whether or not it can adapt to change and whether or not it can stay sharp during periods of little change, setting itself up for success or failure when changes inevitably arise.
Inertia describes an organization’s resistance to change: its tendency to continue operating as it has in the past, and the difficulty it has implementing changes. Entropy describes the way an organization tends to devolve into a state of chaos—disorganized and with a lack of focus—if it is not actively managed, even in times of stability.
Inertia and entropy can pose great threats to an organization but also great opportunities. Sometimes, an organization’s biggest challenges are its own inertia (internal stasis) and entropy (inefficiency). However, an organization that takes advantage of other organizations’ inertia and entropy can leapfrog their success. Understanding these influences can help you craft strategy that might prevent their potential negative effects and might also exploit their potential.
If your organization suffers from inertia, it is less able to adapt to competitive changes. Inertia generally falls into one of three categories:
Recognizing which category fits your own particular inertia can help you properly address it. Recognizing which fits a competitor’s inertia can help you exploit it.
Inertia of habits and policies can prevent a company from quickly reacting to competitive threats.
Any sizable organization that’s been around for at least a few years relies on a set of routines and habits to guide its everyday operations, such as how it buys and markets products, pursues new business, hires talent, designs facilities, and outlines plans. This can benefit a company greatly; an organization does not have the time or resources to reinvent the wheel at every decision, and its ability to operate successfully is supported by layers of accumulated knowledge and expertise. However, these habits can be detrimental to a company when they preserve old ways of doing things that may not be appropriate when changes come along—for example, continuing to charge certain surcharges when your competitors have dropped the practice.
To change inertia that’s linked to habits and routines, a company needs to get its top management on board with the new way of thinking. Sometimes, top management sees the value in the changes and the company can be turned around quickly. Other times, managers who cannot adjust will need to be replaced, often with people from other firms who already use the new methods.
The deregulation of the U.S. airline industry in 1978 illustrates the effects of inertia of habits. Airlines freed from governmental regulation had trouble adjusting to the new competitive landscape in two ways.
First, they misunderstood how price pressures would change. When prices were set by the government, expensive, profitable long-haul routes subsidized cheap, loss-producing short-haul routes. After deregulation, all the major airlines assumed that those dynamics would continue. However, this did not prove to be the case: Customers wanted lower fares for long routes, but they were more willing to pay higher fares for short routes.
Second, they misjudged how capacity constraints would change. Before deregulation, airlines would invest in new equipment and bigger planes without considering whether or not consumer demand would support it because they knew the government would set prices that would cover their debts. Therefore, with no incentive not to increase the sizes of aircraft, the industry ended up with a significant oversupply of seats. Their rule of thumb became, “Equip when the competition equips.” After deregulation, this habit led to massive overcapacity.
The major airlines, operating on habits and procedures developed for a previous era, were unable to stay profitable. In 1981, the carriers who had continued to bet on a strategy of expensive long-haul routes (United, American, and Eastern) together lost 240 million dollars, while carriers who’d pivoted toward making short-haul routes more pricey (including Delta, Frontier, and USAir) turned a profit.
Inertia of culture can also stop a company from reacting quickly to competitive challenges. “Culture” describes the stable, change-resistant elements of social behavior. Cultural inertia often shows up in overly complex processes and routines that a company has incorporated into its daily operations, such as managers who make virtually all decisions by committee, setting up endless meetings instead of delegating decision-making power to individuals.
Organizational culture can prove very hard to change. When presented with strategy solutions that deviate significantly from previous modes of thinking, executives often respond defensively, preferring to double down on existing beliefs and attitudes that drive the company, even if those norms are ultimately harmful.
For example, in the 1980s, AT&T knew it needed to enter the computer communications arena. As the owner of Bell Labs—developers of Unix, the operating system that today underpins Linux and Apple’s Mac OS X—the company seemed to have the resources needed to become a key player. However, its executives assumed that all problems would have complex solutions, a false belief that stemmed from their experiences running the company up to that point. Thus, when tasked with creating a computer network, AT&T ignored simple solutions presented to them and instead opted for a long, expensive, complex solution from Bell Labs. Because they were unable to see past their traditional beliefs in complexity, more nimble competitors were able to leapfrog them.
To break cultural inertia, a company must simplify the complex processes and routines that their workforce has become accustomed to. Such complexity usually hides waste and inefficiency. This means reducing administrative overhead, closing down or outsourcing non-essential operations, and culling unnecessary initiatives. Sometimes, an organization will need to fragment its departments to cut off harmful modes of thinking that cross operating units. Additionally, top management may need to be replaced in order to establish a new set of values and norms from the top down.
At times, inertia comes from a company’s customers instead of from the company itself. If a company’s customers have not yet changed their buying habits in response to an industry change, the company might resist changing because it doesn’t want to let go of those sales that they’ve come to rely on. This kind of indirect inertia has the same result as when a company has inertia internally, because it prevents a company from adjusting to the changing landscape. A company suffering from indirect inertia is vulnerable to competitors because its rivals sense that they can make a play for the company’s business without the company responding.
An example of this was the Philadelphia Savings Fund Society (PSFS), a bank that continued to offer savings accounts with five-percent interest returns even when, in 1980, the prime interest rate set by the government hit 20 percent and other banks started to offer savings accounts with much higher rates as a result. PSFS chose not to follow its competitors’ leads because it reasoned that its average depositor was retired, unsophisticated, and unaware of the higher rates offered by other banks, and therefore the bank could get away with keeping interest rates low simply because their customers had inertia. This left it open to competitors, who could easily poach its customers without the bank mounting a meaningful response.
Indirect inertia can be resolved when an organization finally decides to endure short-term loss for long-term gain. If this happens quickly enough, a company might be able to recapture some of the opportunities it had passed up. If it delays making this change for too long, though, it may allow a competitor to establish dominance in the new landscape and may not be able to win back the new business.
An organization suffers from entropy when it loses its edge, often because of a lack of ongoing competition that allows it to grow complacent. A properly functioning company uses conscious design to impose order on a chaotic set of business inputs. Without purposeful attention and active maintenance, this design starts to fall apart, and organizational coherence is lost. If your organization suffers from entropy, it is less able to prepare for competitive changes because its leadership is essentially asleep at the wheel.
You can see entropy when a company produces a wide, unfocused range of products, when prices are set low to please the salesforce instead of because it’s the best competitive strategy, and when executive bonuses outpace the value of the company.
General Motors (GM) provides an excellent example of organizational entropy and how it can impact a company’s sales. In the company’s early days of the 1920s, its leadership streamlined and focused its product line, reducing its offerings from seven makes that sometimes competed with each other to five clearly distinctive makes each positioned in a defined price range, so that, for example, a Chevrolet model didn’t overlap with a Buick model. This clear strategy propelled the company to great success through the middle of the twentieth century.
Unfortunately, after enjoying industry dominance for several decades, the company grew complacent and in the latter half of the century, its well-crafted strategy design loosened up. The different lines, operating within a decentralized structure, started following opportunities that benefited themselves individually at the expense of other divisions. For example, executives at Chevrolet noticed they could increase their own sales with a more expensive model, ignoring the fact that it would cut into Pontiac’s market share. Likewise, Pontiac noticed it could increase its sales with a more affordable model, ignoring the fact that it would eat into Chevrolet’s customer base.
As the company devolved into a loose, uncoordinated collection of unrelated divisions which ate into each others’ businesses, rather than an integrated, coherent whole that was focused on positioning itself in the wider marketplace, its sales declined. Oldsmobile was closed down in 2001 and GM declared bankruptcy in 2009. It then dropped its Saturn, Pontiac, and Hummer brands. Decades of unfocused management decisions had created a company without a clear vision on how to stay competitive.
When creating your strategy, choose one or two narrow goals and don’t be distracted by other goals that will only serve to spread your resources and focus. Don’t mistake growth as a goal: Growth is a sign of a healthy company but it’s not a strategic goal in and of itself.
Then, choose feasible objectives that you can reasonably expect to achieve in pursuit of your goal.
These concepts are explored in the following sections.
At its heart, good strategy is about focus: A leader must identify one or two critical goals for her organization and then come up with a plan to direct actions and resources at these goals, to the exclusion of other, less-critical goals that might distract from this focus. By limiting her strategy’s focus, she increases the likelihood of reaching those goals, rather than trying to take on too much.
Strategic focus works in two directions: internally and externally. To focus your efforts internally, get rid of policies and aims that don’t support your primary goal. To focus your efforts externally, direct them at a specific, defined target. Often, a company will accomplish this by narrowing its target market down to a smaller segment or passing up opportunities to provide additional services if those services dilute its focus. It can be difficult to resist chasing all pieces of the pie, but your company will very often be stronger if it does so.
Crown Cork & Seal provides an excellent example of how a tight focus on a smaller market segment and a specific service can drive a company’s success.
Crown is a maker of metal containers. In its early years in the 1960s, the company had three primary competitors, each of which manufactured cans for beverage companies and dominated the market with large, long production runs for these companies. Instead of chasing this business, though, Crown focused on a niche market of shorter rush orders for smaller companies—seasonal orders or unexpected surges in demand.
Even though Crown was much smaller than its rivals, it was far more profitable than them. Because it was not caught in long-term contracts with the dominant players, the company remained in control of the bargaining process and was better positioned to set its prices. Further, it could charge a premium for its services, offering expertise and customer relations that its larger rivals couldn’t match. By focusing on this smaller market, Crown was thus able to avoid many of the competitive pressures that drove down profits for its competitors.
A good strategy recognizes the difference between organic, healthy growth and manufactured, unhealthy growth, and resists the temptation to grow just for the sake of growing. Healthy growth comes from a combination of growing demand and expanded capabilities. Unhealthy growth is forced through acquisitions that may not fit a company’s original strategic vision. Often, conglomerates formed this way are loosely integrated, are unfocused, and end in failure.
Leaders often look to growth as a means of increasing efficiency and lowering costs. They also hope being larger will open their company up to more opportunities. Unfortunately, both of these beliefs often turn out to be wrong.
First, the hope for greater efficiency and lower costs frequently turns out to be a myth for a number of reasons. Executives of large firms typically earn higher salaries, and even though some executives are let go after acquisitions, a significant number of them are kept on and simply moved into more peripheral roles, thus retaining their overhead. Further, there are high costs associated with buying a company: Companies, especially public ones, are typically overpriced, and you may end up paying twenty-five percent more than the company’s market value. There are also hefty fees paid to the bankers, consultants, and lawyers who make the merger happen.
Second, a company caught up in growth-by-acquisition and hoping for new opportunities often finds that the “growth” they’ve added to their portfolios is really no more than substitution of one new market segment for an older market segment they’d already conquered. For example, imagine an established metals company has recently acquired a plastics company. The metals company’s customers might start buying plastic goods instead of metal goods, but won’t buy both, so overall sales might remain flat. Growth based on substitution has inherent limitations and eventually, such growth will slow or even halt.
The story of Crown Cork & Seal in the 1990s illustrates the dangers of acquiring companies and losing sight of core strategic insights. In 1989, the CEO who had spearheaded Crown’s focused strategy (discussed above) stepped down. The new CEO immediately embarked on an acquisitions spree. He bought one of his American competitors, several other metals companies, a plastics company, and the largest plastics and metal manufacturer in Europe. His stated strategy was to get bigger in order to build a platform for further growth—in other words, to grow in order to grow.
However, the company ended up simply substituting one product category—metals—for another—plastics. It began producing plastic containers for its clients rather than metal ones, but its overall business didn’t increase. The company lost sight of the competitive advantage that had powered its success up to that point: flexibility, personalized customer service, short runs, and a strong bargaining position against its customers. Crown’s shareholder returns and stock value plummeted.
As we discussed briefly in Chapter 2, a good strategy will focus on achievable, realistic objectives that enable it to reach its larger, more overarching goals.
If goals are the ultimate driving force behind a strategy, objectives are the smaller, sub-goals that plot out the path to achieving them. When choosing objectives, it is crucial that leaders pick ones that are ambitious but reasonable given an organization’s resources.
An even better approach is to choose objectives that seem out of reach but are actually perfectly realistic based on your organization’s capabilities. These kinds of objectives allow your organization to outperform expectations, which can encourage further investment in your company and can improve morale among your employees, both of which make future successes more likely.
A good example of this was John F. Kennedy’s 1961 proposal to put a man on the moon. At the time, public opinion saw this as an out-of-reach ambition, but it was in fact a carefully chosen goal informed by a solid understanding of existing technology and what specifically needed to be further developed to get there.
When you choose unrealistic objectives, you set your organization up for failure. Goals that outpace your current capabilities are inherently unachievable, and will result in wasted time, wasted energy, and decreased morale. An example of an unfeasible objective was the “War on Drugs” in the 1980s and 1990s. Calling for the complete cessation of illegal drug use was not realistic given existing law-enforcement capabilities.
Feasible objectives can move a strategy forward by cutting through complexity. Very often, challenges are ambiguous and complicated, and an organization can struggle to get started addressing them. In these situations, a leader can guide her organization through ambiguity with a simple, achievable action plan.
An excellent example of this is the experiences of the NASA team working on achieving Kennedy’s moon landing mentioned above. Designing a vehicle to land on the moon was a complex task made more so by the team’s lack of knowledge of the surface of the moon. For all they knew, it could have been covered in sharp crystals, large, unlandable boulders, or powdery, sinkable dust. To cut through this ambiguity, one of the lead engineers determined that the surface was most likely similar to the American Southwestern desert: flat, hard, and grainy. She may have been wrong, but she knew that the engineers couldn’t work without specifications, so she chose a feasible objective that allowed the project to move forward. It was an educated guess that turned out to be correct, but the real value in it was that it allowed the team to get started.
Feasible objectives can also move a strategy forward by focusing on the immediate future rather than the far future. The purpose of setting objectives is to embark on near-term actions that will create long-term opportunities. Unfortunately, many strategists encourage companies to focus instead on the far future, as if naming the company’s ultimate destination will reveal the road map to get there. It won’t.
Many strategists further believe that when a company's current situation is unstable and changing, a leader should look even farther ahead, as if aiming for higher long-term goals will be enough to guide the organization out of its current problems. However, when a situation is unstable, it becomes even more important to choose reasonable, near-term objectives that set the company up for success in the close future, and which then create opportunities for the far future.
To see how working with feasible, near-term objectives rather than long-term, lofty goals might be useful in the business world, imagine a local business school that wants to become a large, regional institution (long-term goal). The school’s leaders may have a laundry list of desired goals, including higher pay for teachers, the creation of new programs, and infrastructure upgrades. However, when pressed to name one feasible, short-term objective, they might decide that getting their students better jobs would open them up to the most long-term opportunities. When students get better jobs, they are happier, they increase the school’s reputation, they donate more money to the school as alumni, and they increase graduating students’ networks. As a result, more and better students would be drawn to the school and more resources would then become available to teach them.
When choosing objectives, keep in mind that there will be objectives that are currently feasible given your current resources, and there are others that will become feasible only after you or your organization has grown. Achieving one objective will bring you resources and experience that can help you achieve the next. In this way, feasible objectives are like rungs on a ladder, and an organization must master its own reachable objectives before it can grab the next rung.
Depending on an organization’s stage of maturity and accumulated resources, what one company sees as feasible, another will not. For example, the feasible objectives of a small start-up will center around logistics issues like distribution or basic marketing. A start-up will not yet be in a position to think about, say, opening international offices. But once it’s mastered its logistics issues, it may then be in a position to consider international expansion.
Thus, when choosing objectives, keep in mind what is reasonable and achievable given your organization's current strengths and resources.
A good strategy will focus on achievable, realistic objectives that enable it to reach its larger, more overarching goals.
Name one long-term goal of your organization. (Be as specific as possible; avoid general statements like “long-term success” and focus more on a specific way your organization can differentiate itself in the marketplace or something specific that it can accomplish.)
Name one objective you want your organization to accomplish in the next year or two that will bring it closer to this long-term goal. (Think of something specific and achievable given your current resources.)
List one or two actions your organization can take to move you closer to the short-term objective listed above. (Think of specific and achievable actions that you can reasonably plan for.)
A good strategy is a well-integrated, tight design made up of parts (divisions, resources, initiatives, and so on) working together to form a coherent whole. Good performance is the result of a clever strategy design efficiently harnessing an organization’s resources and capabilities to produce a competitive advantage.
Think of strategy design as building a car: While any collection of car parts can be pieced together to form a drivable vehicle, a recognizably branded car is more than simply the sum of its parts. Its pieces are purposefully chosen to carry out a specific design, just as the pieces of a strategy should work together to achieve a specific objective.
Strategy must be designed with two points of view in mind: your customer and your competitor. You must design the strategy not only with the preferences of your customer in mind, but also with the capabilities of your competitor accounted for, so that you can offer something that capitalizes on your strengths in relation to theirs.
Then, in the same way that designs need to be continually tweaked to ensure that all parts are working together properly and that the overall vision offers something unique, strategy must also be treated as a constantly evolving design. So, just as a car design is not finished until the engineers ensure that the steering, suspension, and electrical controls all interact smoothly, and that they all support the chosen body design and trimmings, a strategy design is not complete until each of its policies is fully coordinated with the others, and constantly adjusted as conditions change.
Achieving such coordination can be difficult. The many interactions between various parts of a design create a series of “trade-offs,” or compromises. When you optimize one interaction, others are altered, and this can create problems in other areas.
For example, engineers designing a spacecraft might reduce the size of a power unit to meet overall weight restrictions. That might cause the radio to have less power, which means the engineers must increase the accuracy of the receiving dish, which in turn means they’ll need better sensors, which in turn means they’ll need more fuel for altitude control. Each choice to optimize one interaction creates restrictions for others.
The greater the challenge facing an organization, the greater its need for clever strategy design. And while highly integrated design—with tightly coordinated initiatives linking departments, divisions, and resources—is the best way to manage highly complex situations, it may not be the right choice for every situation. In the face of lesser challenges, a less-highly-integrated design may be preferable.
This is because there are costs to highly efficient designs. A highly integrated design is harder to develop, takes more supervision to implement, and is less flexible to change. For example, a race car has a much higher degree of design integration than does a Honda CRV, but the race car is not appropriate for as many purposes as is the Honda. In the same way, a corporate strategy that involves tight coordination between many different departments will require, for example, employees to manage that coordination and may not be worth the extra labor expense if the challenges facing the company aren’t daunting.
Further, if a company has plenty of resources and capabilities, and few restrictions, they will have less of a need for a tightly integrated design. For example, in the example above, if the engineers had a more efficient radio power supply in the first place, or had less-tight weight restrictions, they wouldn’t need to optimize each of the other pieces of the design so precisely.
Consider the specific needs of your organization when you design its strategy so you can meet its needs with the appropriate amount of complexity. However, keep in mind that ultimately, you should have a design of some complexity; having no design can suit a company in the short-run but can lead to complacency (and ultimately, failure) in the long-run. The trajectory of Xerox, explored below, illustrates this problem.
Xerox provides an excellent example of the way a lack of design, born from a company’s strong resource base, can lead to complacency and ultimately failure.
Because of its rock-solid patents, Xerox dominated the market for photocopiers for decades in the second half of the twentieth century. Because it had virtually no competition, it didn’t need a clever or innovative design behind its strategy: It simply made expensive photocopiers and supported their maintenance with an army of expensive repair people. Its strong resource position—those patents—allowed it to be successful without ongoing strategy management. Consequently, it didn’t prepare for “next steps.” It was, therefore, poorly positioned to meet competition when it did arise (as competition inevitably will) from Canon, Kodak, and IBM.
Xerox fell prey to the faulty thinking behind many resource-rich organizations, which fail to recognize that their ongoing success is a product of long-ago investment, but that these harvests eventually run out. This faulty thinking fells many mature companies. Younger companies invading a marketspace are more likely to have design-based strategies to make up for what they lack in resources, and ultimately succeed because of it.
Of course, the natural life cycles of maturing companies mean that many of these upstarts will eventually also come to rely on leftover success from earlier clever design, and will eventually become vulnerable to a new generation of upstarts. For example, though Bill Gates bested IBM in the 1980s, today Microsoft is a mature company reaping the benefits of past accomplishments just as IBM once did.
In planning your strategy to position your organization so that competitors will have an uphill battle overtaking it, anticipate fundamental shifts in the landscape and exploit them before others do. Fundamental changes to an existing industry structure can upend existing competitive dynamics and create valuable opportunities for those who are tuned in and ready to exploit them.
Fundamental changes come from many sources:
To effectively exploit such changes, you need to predict how your industry or the wider landscape will evolve because of them, and then divert resources, energy, and innovation accordingly. Additionally, you need to react to the changes early in their development, before your competitors have had a chance to establish their dominance in the new landscape.
Look not only for direct effects of changes but also for secondary effects, which may be equally profitable but less initially obvious. Any company taking advantage of less obvious knock-on effects of a change may have less initial competition—a significant strength.
For example, the advent of television in the 1950s brought free, accessible entertainment into peoples’ homes. Established film production companies had, until then, made money on a steady stream of mediocre movies, but competition from the free, in-home entertainment provided by television meant that by the 1960s, movie audiences had shrunk significantly. What ultimately revived the movie industry was a shift to independent films, whereby studios financed independent producers and directors to create higher-quality movies that would entice audiences into the theaters again. Thus, the rise of an independent film industry became a secondary effect of the technological change of television.
Sometimes it is easy to see when a change is happening but not so easy to figure out what the repercussions will be: how it will affect your industry or the wider landscape. There are three common assumptions people make when assessing change that lead them to wrongly forecast the fallout from those changes:
1. People don't correctly predict the eventual flattening of a new surge in demand. For durable goods—televisions, printers, phones—sales typically follow a predictable trajectory of sharp initial growth followed by a slowdown as everyone who wants the product acquires one. As a product category matures, sales eventually will hew closely to population growth and replacement rates.
Unfortunately, when making budget projections, corporate strategists often prefer to ignore this reality. Unfounded optimism and an unwillingness to admit there’ll be an end to their good fortune leads many strategists to plan for infinite growth, which never holds up to expectations and can therefore lead to unrealistic action plans.
2. People assume existing market leaders will be the primary contenders in a changing landscape. While this is sometimes true, very often an outsider is able to take advantage of a structural change more efficiently than an incumbent.
For example, in the last decades of the twentieth century, the computing industry began to consolidate with the communications industry. Most corporations and government agencies assumed the resulting battle for dominance would pit the two existing industry giants, AT&T and IBM, against each other. However, other players entered the ring and completely shifted the dynamic, bringing with them new software, the microprocessor, the decentralization of computing, and the Internet—elements that AT&T and IBM were not prepared for.
3. People assume that after a transition, the future winners will have business models very similar to those of the current dominant players. People fail to see how fundamentally changes will alter the ways companies conduct business. For example, when the Internet became prominent in the late 1990s, people assumed companies like AOL would dominate with their “protected portals” to the internet, herding their users toward a curated set of web pages. People did not account for the way the sheer scale of the Internet would obviate the need for such curation.
When assessing change and predicting how it will play out, try to visualize the “ideal state” of an industry: the way an industry would work if it met the needs of customers as efficiently as possible. This will usually reveal the ultimate direction of an industry, as organizations generally evolve towards, not away from, efficiency, and buyers are innately drawn to solutions that meet their needs with the least amount of trouble.
An example of a company properly anticipating an industry’s ideal state was Cisco and its strategy of “IP everywhere” in telecommunications. The company envisioned that all packets of data would be coded into IP (Internet Protocol) and could be read by individual devices plugged into the Internet network. This was in contrast to the then-current but more complex system of “smart” networks that read the data first and then delivered it to the end user’s device. Recognizing the efficiency of “IP everywhere” allowed Cisco to overtake the established players in the field.
Unfortunately, leaders sometimes are blind to the ideal state because it is based on overall efficiency, while they tend to focus on their own company’s particular ambitions. For example, the music producers and distributors that dismissed the disruption posed by digital music service Napster failed to see how enthusiastically customers would embrace a system where they could download, copy, and email a song as a file. The incumbents, focused on protecting the system that had benefited them for so many years, ignored the ideal state of the industry until they had to play catch-up with their own digital innovations in order to stay competitive.
Fundamental changes come from a variety of sources including rising costs, deregulation, changes in technology, and changing buyer preferences.
What are some possible changes facing your industry in the next few years?
How will those changes affect the competitive landscape for your industry? For instance, do you predict they’ll create conditions more favorable to certain organizations over others?
How will those changes affect your organization specifically?
What can you do to prepare for this upcoming change? (For example, what might be some changes you can make that will position your organization to either take advantage of the coming opportunities or weather the coming storm?)
The trajectory of the 3-D graphics chip company Nvidia illustrates how an organization can use many of the above concepts to craft good strategy and propel itself to success.
Nvidia was formed in 1993 by three executives from other computer-development companies and quickly rose in prominence, ultimately surpassing the more established industry firms and becoming the dominant designer of 3-D graphics chips. To do so, it developed a solid, clear strategy that incorporated many of the techniques discussed here:
Now that we’ve examined a variety of elements that go into the making of good strategy, let’s look at techniques and approaches you can use to incorporate these elements into your own strategic planning. There are three general guidelines you can adopt that will help clarify your thinking:
We’ll explore each of these guidelines in the following sections.
One approach to developing good strategies is to use the scientific method. The method involves a researcher testing a hypothesis—a prediction of how the world works—by observing if it holds up to experimentation in real life. A strategy is a type of hypothesis, and as strategists, we must measure its value by examining its success in practice—testing if our customers react to a price change as we are hoping, for example.
Often, a hypothesis starts with an “anomaly,” or something that grabs your attention because it represents a difference between what you observe and what you expect. In the world of science this might mean questioning why snow doesn’t melt as fast as you’d expect it to when the weather warms up (a question that led to the discovery of thermodynamics). In the business world, an anomaly might lead you to ask why there are no upscale products offered by American fast-food companies (an observation that led to Starbucks). Recognizing an anomaly can lead you to unexpected opportunities that have been previously overlooked by competitors.
Starbucks is a great example of a company employing the scientific method to improve its product and services.
In 1983, Howard Schultz traveled to Italy and noticed an anomaly when he observed the coffee house culture there. The Italian coffee house was different from anything he’d seen in the U.S., and he wondered why something similar had never been introduced state-side. He formed a hypothesis that Americans would embrace many of the Italian coffee house’s characteristics: the camaraderie between the customers, the showmanship of the baristas, and the quality product served in a fast format.
He tested his hypothesis by opening a small coffee house that faithfully replicated the Italian experience, down to the opera music in the background and the waiters in bow ties. Then, like a true scientist, he observed the results of his experiment by gauging customer reactions. As he gathered data on his customers’ preferences, he proceeded to alter his original model—for example, eliminating the opera music and the bow ties, but keeping the baristas central to the concept—until he had found a formula that resonated with the market. His final concept looked very unlike his first attempt but had developed a far stronger structure, based on how it worked in the real world rather than merely in his imagination.
Importantly, in order to enhance its experiment, Starbucks vertically integrated its operations, acting as its own roaster, brander, and retailer. By doing so, it was able to gather more data on its customers and adjust elements of its operations as needed to perfect its strategy by controlling more of the process. This vertical integration was innovative in the coffee industry and as a result, it acted as a protection against serious competition. Other coffee companies, especially European ones with deep experience in either roasting or retailing coffee beans and beverages, were slow to catch on to the new corporate structure until Starbucks was already well-established. This is again an illustration of using your advantage to make it difficult for your rivals to keep up.
To develop good strategies, you must also think like an analyst, consciously and carefully examining your challenges and options. Very often, the key to developing a good strategy is simply to devote the mental energy towards thinking about it in specific terms. Sitting down and directly thinking about the challenges and opportunities facing your organization can be enough to give you a leg up on the competition. Unfortunately, many leaders and organizations run on auto-pilot, assuming they generally know what they’re doing and where they’re heading. As a result, they don’t bother to give their strategies explicit thought.
There are many techniques you can use to analyze your organization’s challenges and opportunities. Some of these include:
We’ll explore each of these techniques further in the sections below.
The process of crafting good strategy often starts with the basic exercise of making a list of the most important things for your organization to address in the near future. Though it may sound elementary, the act of writing your goals and objectives down on paper forces you to think through them in a way you may not be consciously doing on a day-to-day basis, and it can shed light on neglected aspects of your business.
Making a list can prevent our human tendency to focus only on what’s directly in front of us and forget about other responsibilities. The human brain has a finite attention span and limited cognitive resources, and when we direct our attention to one issue, other issues sometimes get neglected. For example, a CEO might get caught up trying to lower costs on production and forget, for a while, about pushing innovation. Stepping back and consciously examining the management issues you face, your strengths, your weaknesses, and the ways that various departments interact with each other helps bring these issues to the forefront, reminding you of things you may have lost sight of while you were focused on other aspects of running your organization.
Making a list can also help you see which goals and action plans you should be devoting more time and resources to. When you get caught up in the daily operations of your organization, reactively making decisions moment-to-moment, you often end up with a shortsighted view of your challenges, and you might lose track of which operations and action plans are most important in the long run. Making a list can help you take a step back and see your organization with a wide-angle lens, allowing you to see where you might need to refocus energy and resources proactively, rather than reactively. Often, being strategic means simply being less myopic than others, whether those “others” are your colleagues or competitors.
Crafting good strategy also involves evaluating the complete set of options available to you. To do this, you must consciously seek out alternatives to the obvious solutions, to ensure you are not ignoring a potential solution hiding in the shadows.
When trying to solve problems, most people latch onto the first solution that pops into their heads. This is partly due to the way our brains have evolved: We don’t have the time or mental resources to thoroughly analyze every decision we come across on a daily basis, so we make snap judgments.
Often, this works out for us: The first solution that occurs to us is, in fact, the right one, such as which yogurt to have for lunch, or whether or not to speed up when approaching that yellow light. However, there are limits to the benefits of snap judgments. Though they may aid us with simple, everyday decisions, they are often less helpful when it comes to processing complex choices, like whether or not to merge with another company or to offer a new product line.
Complexity is filled with uncertainty, and our brains don’t like uncertainty. Sometimes we make snap judgments to convince ourselves that we’ve resolved that uncertainty. However, snap judgments rarely provide intelligent answers to complexity; when a problem is complex and ill-structured, with dozens of variables, unknowns, and no clear link between actions and outcomes, it can be difficult to know what the right answer is. For example, a company experiencing declining sales might face a wide variety of challenges causing that decline. Latching onto the first solution that occurs to it simply because it offers a way out of uncertainty might lead the company down the wrong path.
Once we’ve made a snap judgment, we run into another problem stemming from our human nature: We tend to defend an idea once we’ve settled on it. We don’t like to question our own decisions when it’s so much easier to just believe that we’ve hit the nail on the head. Thus, we’ll spend valuable time justifying a decision rather than examining it.
A better way to approach the process of collecting options is to practice looking for secondary and tertiary options. Making a list can be helpful here, too. Write down a list of all the challenges facing your organization, then come up with one or two solutions for each. Push yourself to move beyond the obvious solutions that present themselves first and to search for the ones that may be less obvious, as these may be less obvious to competitors as well.
To avoid becoming committed to a decision that may not be the best choice, test it out by “vetting” it through a mental panel of critiquers made up of people you know well and whose opinions you value. Doing this can shed light on aspects of the decision you might otherwise overlook.
A trusted advisor, be it in business or your personal life, has a specific personality and a point of view that you can probably predict. Having a virtual conversation with her based on her imagined response to an issue or decision can be almost as helpful as having a real conversation. For example, maybe one of your former professors always focused on the broader implications of change in an industry; you might imagine she’d ask you to think through how your decision might open or close opportunities for you next year. Or maybe a colleague is always talking about a company’s proprietary information; she might ask you what makes your solution difficult for your competitors to replicate.
In the end, strategy is a judgment call—an educated guess about what will lead your organization to success or failure. Arriving at that call is an important step. Once you’ve examined all possible options from all possible angles, you must then commit to a plan of action. Committing to something gives you a starting point and a point of comparison from which you can evaluate other action plans, priorities, and diagnoses of the challenges. Sometimes choosing among endless options is more difficult than deciding between two, and if you commit to one option, it’s easier to evaluate other options by asking whether they're better or worse than this particular one. Be open to other peoples’ arguments, and don’t defend your position against reasonable pushback, but do choose a platform to compare other judgments against.
When strategy fails, a company often goes out of business or an organization ceases to operate. On a governmental level, failed strategy can result in an economic crash or a lost war. Such failures are often the result of failures of thinking, and typically can be categorized into one (or more) of five common faulty biases:
The “engineering overreach” bias: where strategy designers fail to analyze or comprehend the ways in which their design can fail, as well as the consequences of such failure. For example, the innovative financial instruments created in the 2000s that led to the financial collapse of 2008 were not well understood by either the bankers who sold them or their customers—and no one fully understood the consequences of the system failing.
The “smooth sailing” bias: where people believe that when things are going well, they will continue to go well. Unfortunately, some designs are built with a critical design flaw that doesn’t reveal itself until it is catastrophically triggered. In other words, everything in a system might work well with no warning tremors until all at once, the entire design collapses. To continue the previous example, when bankers, mortgage lenders, and the government built an entire financial industry on the premise that home prices will never decline, they failed to see the fundamental design flaw that only revealed itself when things started to collapse—and then everything collapsed at once.
The “risk-seeking” bias: where people are incentivized to seek risks because they keep profits when things go well but other people shoulder the losses when things go poorly. This behavior can be seen in the financial industry when banks take on more debt than they can cover and eventually get bailed out by the government, as did Long-Term Capital Management in 1998. These bailouts only encourage future excessive risk taking, because they set the example that should a gamble fail, the bank that made it won’t suffer the consequences.
The “social herding” bias: where people ignore obvious problems simply because other people are ignoring them. This happens because when we don’t understand something, our human nature instructs us to seek guidance from other people. Unfortunately, when everyone shares the same level of misunderstanding, they end up in a “blind leading the blind” situation, with everyone believing that everyone else knows what they’re doing, even when that’s not the case. This bias partly explains what happened leading up to the 2008 financial collapse. Everyone assumed that because everyone else was betting big on mortgage-backed securities, the strategy must be sound.
The “inside view” bias: where people see themselves, their group, their organization, their country, or their era as different and special, believing that what happens to other people can’t happen to them. For example, most people know that talking on a phone while driving greatly increases your risk for accidents, but they often falsely believe that they themselves are exempt from this risk because they trust their own driving skills, a fallacy which leads people to continue to engage in this risky behavior even knowing the statistics.
In the business world, we saw this false thinking again in the lead-up to the 2008 crash, when people convinced themselves that this particular economic bubble would not burst in the way previous bubbles had because it was different for a number of reasons—for example, people believed America’s financial markets were robust enough to absorb shocks and that the Federal Reserve was skilled enough to prevent them. Everyone ignored the fact that the rise was simply another real-estate-fueled bubble like many others before it, and was just as liable to burst.
Each of these biases leads us to ignore important information and aspects of a strategy that might lead to ruin. Be aware of these biases when you encounter them and prepare to push back against them. When you detect such biases in a group of people discussing and designing strategy, look for outside data that might refute such group-think.
The collapse of the telecommunications developer Global Crossing illustrates these biases in action. In the late 1990s, the company began laying cable across the Atlantic Ocean to connect North America’s telecommunication networks to Europe’s. The stock market backed them enthusiastically; six months after the company’s Initial Public Offering on the stock market, the market valued it at $38 billion—more than the Ford Motor Company—even though its profits were only promises at that point.
However, the company was unable to make its investments profitable and in December 2001, saddled with debt, it filed for bankruptcy. It had misjudged its own competitive advantages and long-term strengths by falling for four of the five biases outlined above:
1. Engineering overreach: The company ignored the flaws in its strategy design. First, once their cables had been laid across the ocean floor, the cost to move a call across them was essentially zero. The overhead was almost entirely made up of up-front expenses and fixed maintenance costs, which remained the same no matter how many calls traveled the wires. This meant that there was nothing justifying charging high rates to customers, and in a competitive market where two or more companies were vying for those customers, prices were likely to drop dramatically. (In this way, Global Crossing ignored the ideal state that we mentioned earlier—the state customers would drive the industry to in a quest for efficiency—and instead focused on the ways that their own particular company might benefit from imagined industry dynamics.)
Second, their technology was not proprietary; any competitor could enter the market with the same resources. Third, because technology costs were continuing to decrease, competitors were incentivized to add capacity, which could only lead eventually to a huge oversupply and thus a price crash.
2. Smooth sailing: After laying their first cable across the ocean, the company looked to be on a solid foundation; they were able to sell their capacity for more than they’d spent on construction. They assumed this dynamic would continue. Additionally, no other communications company had yet imploded by following this business model. They therefore assumed no one ever would.
3. Social herding: The stock market valued Global Crossings highly. This led the company’s own executives and consultants, along with other industry players and competitors, to believe that their strategy must be sound. Instead of examining the clear flaws in their business model, they took their lead from investors, who in turn, took their lead from the company’s confidence. It was a circular system of approval in which everyone assumed everyone else knew what they were doing.
4. Inside view: The company dismissed issues like price competition by reasoning that their industry was novel and operated differently from other industries, insisting they’d be insulated from the price pressures of competition for many years before the more established communications companies caught up to them. But clearly, their belief in their own specialness was delusional: As discussed, the company’s product, the Internet, failed to generate revenue because it was essentially a free resource, and competing companies could build the same infrastructure at a fraction of the cost—consumers wouldn’t pay Global Crossing for a nearly-free product they could get for less somewhere else. In believing they were unique and that the laws of economics didn’t apply to them, Global Crossing ignored the fact that they were a company like any other and, as such, would have to make a profit to survive.
A good strategy is often the key difference between success and failure. Crafting good strategy involves ignoring much of the advice and models that are currently out there guiding corporations and governmental agencies. It means knowing the difference between goals and strategies. It means examining your own organization, your competition, and the wider landscape for opportunities and threats and then centering your plans around them. It takes dedicated effort to strategize well, but it’s always worth the time.
The process of crafting good strategy often starts with the basic exercise of making a list of the most important things for your organization to address in the near future.
Make a list of the top challenges facing your organization. This can be a list of just a few things or it can be a dozen.
Examine your list and start to prioritize which of these action items is the most crucial. (For instance, which needs to be accomplished before the others can be accomplished? Which can be accomplished now, given your current resources?)
How well is your current strategy addressing your organization’s top challenge you identified? If it’s not, how might you amend your strategy to better address it?
To avoid becoming committed to a decision that may not be the best choice, test it out by “vetting” it through a mental panel of critiquers made up of people you know well and whose opinions you value.
Make a list of three to five people whose opinions you trust and who have distinctive personalities and views on the world. (Think of people whose reactions you’d be able to predict if you asked for their opinions on world events or business decisions.)
Think of a problem you or your organization faces and write down the solution you are considering to address this problem.
Now, “vet” your solution through your mental panel of judges. How might each of your virtual critiquers respond to your idea? (For instance, what shortcomings might they point out? What opportunities might they see possible?)
Did your mental conversations change your perspective on your solution? Did it open up new insights? How or how not?