Good Strategy Bad Strategy : The Difference and Why it Matters did three great things for me :
- I understood why most of what passes for strategy is indeed a steaming pile of shit (or what the author dubs somewhat more nicely “bad strategy”)
- I learned how interesting strategy becomes once you strip the B-school jargon
- Most importantly, the book made me think about my business and life in new ways. It sent my mind looking for new angles on familiar situations.
If you want to become smarter about your business, I highly recommend this book.
What follows are my highlights from the book. Emphasis in bold is from me. My personal notes appear in italics.
Good strategy almost always looks this simple and obvious and does not take a thick deck of PowerPoint slides to explain. It does not pop out of some “strategic management” tool, matrix, chart, triangle, or fill-in-the-blanks scheme.
Instead, a talented leader identifies the one or two critical issues in the situation—the pivot points that can multiply the effectiveness of effort—and then focuses and concentrates action and resources on them.
The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.
The change came in 2007. Having just written the Army/Marine Corps Counterinsurgency Field Manual, General David Petraeus was sent to Iraq, along with five additional brigades of troops. But more than the extra soldiers, Petraeus was armed with an actual strategy. His idea was that one could combat an insurgency as long as the large preponderance of civilians supported a legitimate government. The trick was to shift the military’s focus from making patrols to protecting the populace. A populace that was not in fear of insurgent retaliation would provide the information necessary to isolate and combat the insurgent minority. This change, replacing amorphous goals with a true problem-solving strategy, made an enormous difference in the results achieved.
The key insight driving this book is the hard-won lesson of a lifetime of experience at strategy work—as a consultant to organizations, as a personal adviser, as a teacher, and as a researcher. A good strategy does more than urge us forward toward a goal or vision. A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them. And the greater the challenge, the more a good strategy focuses and coordinates efforts to achieve a powerful competitive punch or problem-solving effect.
A strategy is NOT a set of goals. It stems from a diagnosis about what the actual problem is.
Bad strategy tends to skip over pesky details such as problems. It ignores the power of choice and focus, trying instead to accommodate a multitude of conflicting demands and interests. Like a quarterback whose only advice to teammates is “Let’s win,” bad strategy covers up its failure to guide by embracing the language of broad goals, ambition, vision, and values.
The gap between good strategy and the jumble of things people label “strategy” has grown over the years. In 1966, when I first began to study business strategy, there were only three books on the subject and no articles.
Rather, the term “strategy” should mean a cohesive response to an important challenge. Unlike a stand-alone decision or a goal, a strategy is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge.
Strategy means many moving pieces. How do you coordinate for max impact ? Cf Armies.
A good strategy includes a set of coherent actions. They are not “implementation” details; they are the punch in the strategy. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.
Strategy isn’t philosophy. Its a set of actions. Priorities and choices may be guided by philosophy/vision but strategy != vision
Strategy is about how an organization will move forward. Doing strategy is figuring out how to advance the organization’s interests. Of course, a leader can set goals and delegate to others the job of figuring out what to do. But that is not strategy. If that is how the organization runs, let’s skip the spin and be honest—call it goal setting.
A good strategy has an essential logical structure that I call the kernel. The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action. The guiding policy specifies the approach to dealing with the obstacles called out in the diagnosis. It is like a signpost, marking the direction forward but not defining the details of the trip. Coherent actions are feasible coordinated policies, resource commitments, and actions designed to carry out the guiding policy.
For example, looking at the U.S. government’s “strategy” for dealing with the 2008 financial crisis, you will see that essential elements are missing. In particular, there was no official diagnosis of the underlying malady. So, there can be no focus of resources and actions on a cure.
The most basic idea of strategy is the application of strength against weakness. Or, if you prefer, strength applied to the most promising opportunity.
Strategy is a bet on certain diagnosis, ie : on certain world view. The more bold / unique the world view, the more upside to a successful implementation ?
The leader of an organization lacking a good strategy may simply believe that strategy is unnecessary. But more often the lack is due to the presence of bad strategy. Like weeds crowding out the grass, bad strategy crowds out good strategy.
This is what I felt in B-school ! Lofty goals and jargon sound cooler than a simple & effective diagnosis.
On Steve Jobs coming back to Apple :
What he did was both obvious and, at the same time, unexpected. He shrunk Apple to a scale and scope suitable to the reality of its being a niche producer in the highly competitive personal computer business. He cut Apple back to a core that could survive.
What is remarkable about Jobs’s turnaround strategy for Apple is how much it was “BusinBusiness 101 is surprisingess 101” and yet how much of it was unanticipated. Of course you have to cut back and simplify to your core to climb out of a financial nosedive. Of course he needed up-to-date versions of Microsoft’s Office software to work on Apple’s computers. Of course Dell’s model of Asian supply-chain manufacturing, short cycle times, and negative working capital was the state of the art in the industry and deserved emulation. Of course he stopped the development of new operating systems—he had just brought the industry’s best operating system with him from NeXT. The power of Jobs’s strategy came from directly tackling the fundamental problem with a focused and coordinated set of actions. He did not announce ambitious revenue or profit goals; he did not indulge in messianic visions of the future. And he did not just cut in a blind ax-wielding frenzy—he redesigned the whole business logic around a simplified product line sold through a limited set of outlets.
Again : good strategy isn’t flashy. It can be “boringly” basic.
They had each told me the formula for success in the 1990s electronics industry—take a good position quickly when a new window of opportunity opens—but none said that was their focus or even mentioned it as part of their strategy.
The solution is so basic and boring nobody wants to do it…
In the summer of 1998, I got an opportunity to talk with Jobs again. I said, “Steve, this turnaround at Apple has been impressive. But everything we know about the PC business says that Apple cannot really push beyond a small niche position. The network effects are just too strong to upset the Wintel standard. So what are you trying to do in the longer term? What is the strategy?” He did not attack my argument. He didn’t agree with it, either. He just smiled and said, “I am going to wait for the next big thing.”
… the one who does ends up winning.
BTW, brilliantly simple strategy : position yourself for the next big thing. Lots of applications in career (building platform and riding the wave).
On the US Army succeeding with a surprise attack, when the tactic was publicly stated to be the “Plan A” in this type of situation :
Given this vivid picture of a feint up the middle combined with a powerful “left hook,” one must ask: “How could Schwarzkopf’s use of the primary offensive doctrine of the U.S. Army have been a surprise to anyone?” Some part of the answer lies in successful deception. Schwarzkopf intended to make it appear that the main attack would be launched into Kuwait from the sea and then overland directly into Iraqi defenses. This was supported by an early visible amphibious raid on the Kuwaiti coast and by actions to destroy Iraq’s navy. The press unwittingly helped in this misdirection by reporting on the photogenic amphibious training, the build-up of troops just south of Kuwait, and then by anguishing over the prospect of World War I trench warfare.
The best answer to this puzzle is that the real surprise was that such a pure and focused strategy was actually implemented. Most complex organizations spread rather than concentrate resources, acting to placate and pay off internal and external interests. Thus, we are surprised when a complex organization, such as Apple or the U.S. Army, actually focuses its actions. Not because of secrecy, but because good strategy itself is unexpected.
Having conflicting goals, dedicating resources to unconnected targets, and accommodating incompatible interests are the luxuries of the rich and powerful, but they make for bad strategy. Despite this, most organizations will not create focused strategies. Instead, they will generate laundry lists of desirable outcomes and, at the same time, ignore the need for genuine competence in coordinating and focusing their resources. Good strategy requires leaders who are willing and able to say no to a wide variety of actions and interests. Strategy is at least as much about what an organization does not do as it is about what it does.
Cf one of my favorite books of last year : Essentialism.
The second natural advantage of many good strategies comes from insight into new sources of strength and weakness. Looking at things from a different or fresh perspective can reveal new realms of advantage and opportunity as well as weakness and threat.
Sounds obvious. But who has the discipline to actually do the analysis themselves ? Most people just copy what others are doing, or succumb to narrative fallacy and other psych biases.
On the story of David and Goliath :
Finally, when the stone strikes Goliath’s forehead, the listener suddenly discovers a critical weakness—Goliath’s armor didn’t cover this vital area. David’s weapon delivered force with precision over a distance, neutering Goliath’s supposed advantages of size and strength. The story teaches us that our preconceived ideas of strength and weakness may be unsound.
The case actually says almost nothing about competition, referring broadly to the discounting industry. But surely executives and MBA students would have thought about this in preparing for this discussion. Yet it is totally predictable that they will not. Because the case does not focus on competition, neither do they. I know it will turn out this way—it always does. Half of what alert participants learn in a strategy exercise is to consider the competition even when no one tells you to do it in advance.
Hard to think for yourself and look out for outside parameters.
Looking just at the actions of a winning firm, you see only part of the picture. Whenever an organization succeeds greatly, there is also, at the same time, either blocked or failed competition.
Survivors bias & narrative fallacy.
competitors will have difficulty in dealing with Wal-Mart. Copying elements of its strategy piecemeal, there will be little benefit. A competitor would have to adopt the whole design, not just a part of it.
If strategy is focusing resources on the most promising opportunity, 1+1 > 2. Cf : Munger’s Lollapalooza Effect
I turn back the whiteboard and stand right next to the boxed principle: “A full-line discount store needs a population base of at least 100,000.” I repeat his phrase, “The Wal-Mart store needs to be part of the network,” while drawing a circle around the word “store.” Then I wait. With luck, someone will get it. As one student tries to articulate the discovery, others get it, and I sense a small avalanche of “ahas,” like a pot of corn kernels suddenly popping. It isn’t the store; it is the network of 150 stores. And the data flows and the management flows and a distribution hub. The network replaced the store. A regional network of 150 stores serves a population of millions! Walton didn’t break the conventional wisdom; he broke the old definition of a store.
Cf Taylor Pearson’s The path to wealth is paved with definition
In making an integrated network into the operating unit of the company, instead of the individual store, Walton broke with an even deeper conventional wisdom of his era: the doctrine of decentralization, that each kettle should sit on its own bottom. Kmart had long adhered to this doctrine, giving each store manager authority to choose product lines, pick vendors, and set prices. After all, we are told that decentralization is a good thing. But the oft-forgotten cost of decentralization is lost coordination across units. Stores that do not choose the same vendors or negotiate the same terms cannot benefit from an integrated network of data and transport. Stores that do not share detailed information about what works and what does not cannot benefit from one another’s learning.
But once Walton’s insights made the decentralized structure a disadvantage, Kmart had a severe problem. A large organization may balk at adopting a new technique, but such change is manageable. But breaking with doctrine—with one’s basic philosophy—is rare absent a near-death experience.
This process of justifying expenditures as counters to Soviet expenditures conditioned U.S. actions on Soviet strengths, expressed as threats, not on Soviet weaknesses and constraints.
Danger of playing defence. The most obvious / instinctive response can cloud the real opportunity. Think about what is absent.
Their insight was framed in the language of business strategy: identify your strengths and weaknesses, assess the opportunities and risks (your opponent’s strengths and weaknesses), and build on your strengths. But the power of that strategy derived from their discovery of a different way of viewing competitive advantage—a shift from thinking about pure military capability to one of looking for ways to impose asymmetric costs on an opponent.
Playing offence : focusing resources where your opponent is weak, or where it is very costly to defend.
What is Bad Strategy, exactly :
Bad strategy, I explained, is not the same thing as no strategy or strategy that fails rather than succeeds. Rather, it is an identifiable way of thinking and writing about strategy that has, unfortunately, been gaining ground. Bad strategy is long on goals and short on policy or action. It assumes that goals are all you need. It puts forward strategic objectives that are incoherent and, sometimes, totally impracticable. It uses high-sounding words and phrases to hide these failings.
The Defense Advanced Research Projects Agency (DARPA) works to achieve radical technological innovation to support national security. As a counterpoint to Harvester, DARPA’s strategy is based on a clear-sighted recognition of the nature of the challenge. Here is DARPA’s own statement of a fundamental problem its strategy addresses:
A basic challenge for any military research organization is matching military problems with technological opportunities, including the new operational concepts those technologies make possible. Parts of this challenge are extremely difficult because: (1) some military problems have no easy or obvious technical solutions; and (2) some emerging technologies may have far-reaching military consequences that are still unclear. DARPA focuses its investments on this “DARPA-hard” niche—a set of technical challenges that, if solved, will be of enormous benefit to U.S. national security, even if the risk of technical failure is high.
DARPA’s strategy is more than a general direction. It includes specific policies that guide its everyday actions. For example, it retains program managers for only four to six years to limit empire building and to bring in fresh talent. The expectation is that a new program manager will be willing to challenge the ideas and work of predecessors. In addition, DARPA has a very limited investment in overhead and physical facilities in order to prevent entrenched interests from thwarting progress in new directions. These policies are based on a realistic appraisal of the obstacles to innovation. They are a far cry from vague aspirations such as “retain the best talent” and “maintain a culture of innovation.”
These are some bold policies ! Philosophy is of limited use if it isn’t translated into discrete processes.
Importantly, opportunities, challenges, and changes don’t come along in nice annual packages. The need for true strategy work is episodic, not necessarily annual.
To help clarify this distinction it is helpful to use the word “goal” to express overall values and desires and to use the word “objective” to denote specific operational targets. Thus, the United States may have “goals” of freedom, justice, peace, security, and happiness. It is strategy which transforms these vague overall goals into a coherent set of actionable objectives—defeat the Taliban and rebuild a decaying infrastructure. A leader’s most important job is creating and constantly adjusting this strategic bridge between goals and objectives.
Good strategy works by focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes.
The One Thing.
If the leader’s strategic objectives are just as difficult to accomplish as the original challenge, there has been little value added by the strategy.
Strategy is a plan to organize resources in a way that simplifies the achievement of a goal.
Cf, again : The One Thing “What’s the ONE Thing I could do, such that by doing it everything else would be easier or unnecessary?”
When a leader characterizes the challenge as underperformance, it sets the stage for bad strategy. Underperformance is a result. The true challenges are the reasons for the underperformance. Unless leadership offers a theory of why things haven’t worked in the past, or why the challenge is difficult, it is hard to generate good strategy.
An interesting aspect of this language is the idea that leadership teams must share common beliefs and values. This is now a frequent demand in education circles. One would hope that the experience of North Korea would have cured people of the idea that forcing everyone to believe in and value the same things is the road to high performance. Yet, within politically correct edu-speak, this impossible state of affairs is continually sought as the path to “transformational change.”
Strategy involves focus and, therefore, choice. And choice means setting aside some goals in favor of others. When this hard work is not done, weak amorphous strategy is the result.
Not everyone was drawn to this formulation. Peter Drucker, one of the foremost thinkers about management, said, “Effective leadership doesn’t depend on charisma. Dwight Eisenhower, George Marshall, and Harry Truman were singularly effective leaders, yet none possessed any more charisma than a dead mackerel.… Charisma does not by itself guarantee effectiveness as a leader.”
Plus, by couching strategy in terms of positives—vision, mission, and values—no feelings are hurt.
Strategy work should be painful
Ascribing the success of Ford and Apple to a vision, shared at all levels, rather than pockets of outstanding competence mixed with luck, is a radical distortion of history.
Good strategy is not just “what” you are trying to do. It is also “why” and “how” you are doing it.
Cf Start with Why : why > how > what
Thus, we should seek coordinated policies only when the gains are very large. There will be costs to demanding coordination, because it will ride roughshod over economies of specialization and more nuanced local responses. The brilliance of good organization is not in making sure that everything is connected to everything else. Down that road lies a frozen maladaptive stasis. Good strategy and good organization lie in specializing on the right activities and imposing only the essential amount of coordination.
Phyllis’s insight that “the engineers can’t work without a specification” applies to most organized human effort. Like the Surveyor design teams, every organization faces a situation where the full complexity and ambiguity of the situation is daunting. An important duty of any leader is to absorb a large part of that complexity and ambiguity, passing on to the organization a simpler problem—one that is solvable. Many leaders fail badly at this responsibility, announcing ambitious goals without resolving a good chunk of ambiguity about the specific obstacles to be overcome. To take responsibility is more than a willingness to accept the blame. It is setting proximate objectives and handing the organization a problem it can actually solve.
Simply the problem. The path to wealth is paved with definition.
The more dynamic the situation, the poorer your foresight will be. Therefore, the more uncertain and dynamic the situation, the more proximate a strategic objective must be.
Two masters trying to defeat each other in a chess game are, during a large part of the game, likely to be making moves that have no immediate end other than to “improve my position.” One does not win a chess game by always selecting moves that are directly aimed at trying to mate the opponent or even at trying to win a particular piece.
On flipping houses :
As an investor, one wants to find limiting factors that can be fixed, such as paint, rather than factors that cannot be fixed, such as highway noise. If you have a special skill or insight at removing limiting factors, then you can be very successful.
This is beautiful !
There are little or no payoffs to incremental improvements in chain-link systems, but Marco avoided this problem by shutting down the normal system of local measurement and reward, refocusing on change itself as the objective.
If the process is a chain, improving one link doesn’t improve the overall output. But you cannot always work on all links at the same time. Solution might just be to work on each link successively and accept that conventional metrics wont improve until you are done.
In any organization there is always a managed tension between the need for decentralized autonomous action and the need for centralized direction and coordination. To produce a turnaround of a chain-link system, Marco Tinelli tipped the balance, at least for a while, strongly toward central direction and coordination.
Chain-link systems can be changed and made excellent. It takes insight into the key bottlenecks. Plus, it takes leadership and the willingness to absorb short-term losses in the quest for future gains.
IKEA’s strategy is an effective way to coordinate policies, but it is hardly secret. Won’t other companies see how it works and copy it, perhaps even improve it? The explanation for its continued excellence and the lack of any effective me-too competition is that its strategy builds on chain-link logic. IKEA’s adroit coordination of policies is a more integrated design than anyone else’s in the furniture business. Traditional furniture retailers do not carry large inventory, traditional manufacturers do not have their own stores, normal retailers do not specify their own designs or use catalogs rather than salespeople, and so on. Because IKEA’s many policies are different from the norm and because they fit together in a coherent design, IKEA’s system has a chain-link logic. That means that adopting only one of these policies does no good—it adds expense to the competitor’s business without providing any real competition to IKEA. Minor adjustments just won’t do—to compete effectively with IKEA, an existing rival would have to virtually start fresh and, in effect, compete with its own existing business. No one did. Today, more than fifty years after IKEA pioneered its new strategy in the furniture industry, no one has really replicated it.
For IKEA’s set of policies to be a source of sustained competitive excellence, three conditions must hold:
- IKEA must perform each of its core activities with outstanding efficiency and effectiveness.
- These core activities must be sufficiently chain-linked that a rival cannot grab business away from IKEA by adopting only one of them and performing it well. That is, a traditional furniture manufacturer that adds a ready-to-assemble line is no real threat to IKEA, nor is a traditional retailer that adds a catalog.
- The chain-linked activities should form an unusual grouping such that expertise in one does not easily carry over to expertise at the others. Thus, a traditional furniture retailer that did add a catalog would still have to master design and logistics and build vastly larger stores to begin to compete with IKEA. Plus, looking beyond traditional furniture companies, there are no potential competitors that possess this mix of resources and competencies.
IKEA teaches us that in building sustained strategic advantage, talented leaders seek to create constellations of activities that are chain-linked. This adds extra effectiveness to the strategy and makes competitive imitation difficult.
Many effective strategies are more designs than decisions—are more constructed than chosen. In these cases, doing strategy is more like designing a high-performance aircraft than deciding which forklift truck to buy or how large to build a new factory. When someone says “Managers are decision makers,” they are not talking about master strategists, for a master strategist is a designer.
I am describing a strategy as a design rather than as a plan or as a choice because I want to emphasize the issue of mutual adjustment. In design problems, where various elements must be arranged, adjusted, and coordinated, there can be sharply peaked gains to getting combinations right and sharp costs to getting them wrong. A good strategy coordinates policies across activities to focus the competitive punch.
Implicit in these principles is the notion that tight integration comes at some cost. That is, one does not always seek the very highest level of integration in a design for a machine or a business. A more tightly integrated design is harder to create, narrower in focus, more fragile in use, and less flexible in responding to change. A Formula 1 racing car, for example, is a tightly integrated design and is faster around the track than a Subaru Forester, but the less tightly integrated Forester is useful for a much wider range of purposes. Nevertheless, when the competitive challenge is very high, it may be necessary to accept these costs and design a tightly integrated response. With less challenge, it is normally better to have a bit less specialization and integration so that a broader market can be addressed.
In our longing for immortality, we ask that these strategic upstarts extend their success forever—the aging businessperson’s quixotic search for sustained competitive advantage. But the incumbent laxity and inertia that gave these upstarts their openings applies to them as well. In time, most will loosen their tight integration and begin to rely more on accumulated resources and less on clever business design. Relying on the profits accruing to accumulated resources, they will lose the discipline of tight integration, allowing independent fiefdoms to flourish and adding so many products and projects that integration becomes impossible. Faced with the natural slowing of growth over time, they will try to create an appearance of youthful vigor with bolt-on acquisitions. Then, when their resource base eventually becomes obsolete, they, too, will become prey to another generation of upstarts. It is the cycle of life. Its important lesson is that we should learn design-type strategy from an upstart’s early conquests rather than from the mature company’s posturing. Study how Bill Gates outsmarted the giant IBM or how Nucor became a leader in the declining steel industry and you will learn design-type strategy. Study Microsoft today and you will see a mature giant, reaping the benefits of past victories but just as tied to its installed base and a rich mix of conflicting initiatives and standards as was IBM in 1985.
Paccar’s strategy is based on doing something well and consistently over a long period of time. That has created difficult-to-replicate resources: its image, its network of experienced dealers, its loyal customers, and the knowledge embedded in its staff of designers and engineers. This position and these kinds of slow-build resources are simply not available to companies, mesmerized by the stock market, who want big results in twelve months. A flexible approach to manufacturing makes Paccar’s variable costs higher than competitors’ but provides stability for its designers and engineers. In addition, its higher margins create a loyal, more dedicated network of dealers. All of this works, in part, because it is not in a high-growth industry that would attract large new investments from outside. To attack it directly, a rival would have to create new brands and new designs, and, quite possibly, sign up new dealers. The high-end market isn’t big enough to warrant that kind of investment.
Some assets can only be built by playing long ball. They will by definition never be available to short-term strategists, and as such, might prove especially valuable as a sustainable competitive advantage.
“If we are not going to automatically accept the opinions of others, how can we independently identify a company’s strategy? We do this by looking at each policy of the company and noticing those that are different from the norm in the industry. We then try to figure out the common target of such distinctive policies—what they are coordinated on accomplishing.”
Stratechery on the Apple Watch is a great example of that.
By focusing on short runs, Crown avoids the captive squeeze. Instead of one customer with several competing suppliers, Crown is a supplier with several customers per plant. Going for long runs made the majors captive. Short runs turn the situation around. Crown hasn’t given up its bargaining power like the captives have.”
Selecting a different specialty (short runs instead of long runs) drives costs up. But it also changes the bargaining balance of power with customers and allow to raise prices even more, leading to 50% more margins than anybody else in the industry.
Crown and the majors are in the same industry but are playing by different rules. By concentrating on a carefully selected part of the market, Crown has not only specialized, it has increased its bargaining power with respect to its buyers. Thus, it captures a larger fraction of the value it creates. The majors, by contrast, have larger volumes of business but capture much lower fractions of the value they create. Thus, Crown crafted a competitive advantage in its target market. It isn’t the biggest can maker, but it makes the most money.
As the students discover Crown Cork & Seal’s focus strategy, there is a sense of surprise. The inner logic is visible after our analysis, although it was not beforehand. The logic of this strategy was not visible in the company’s own self-description, nor in the pronouncements of Wall Street analysts. It wasn’t a secret; it was just that it is hard work to fit the pieces together. Virtually drowning in a twenty-four-hour barrage of superficial news and commentary, the students are surprised that the real world can sometimes have an inner logic that is not secret but that nevertheless remains unremarked.
Strategy is visible to everyone, but it’s hard work to find it.
The problem with diving into the growing PET industry was that growth in a commodity—such as cement or aluminum or PET containers—is an industry phenomenon, driven by an increase in overall demand. The growing demand pulls up profit, which, in turn, induces firms to invest in new capacity. But most of the profits of the growing competitors are an illusion because they are plowed back into new plant and equipment as the business grows. If high profits on these investments can be earned after growth slows, then all is well. But in a commodity industry, as soon as the growth in demand slows down, the profits vanish for firms without competitive advantages. Like some sort of economic black hole, the growing commodity industry absorbs more cash from the ordinary competitor than it ever disgorges.
The problem with engineering growth by acquisition is that when you buy a company, especially a public company, you usually pay too much. You pay a premium over its ordinary market value—usually about 25 percent—plus fees. If you have friendly investment bankers and lenders, you can grow as fast as you like by acquisition. But unless you can buy companies for less than they are worth, or unless you are specially positioned to add more value to the target than anyone else can, no value is created by such expansion.
No one has an advantage at everything. Teams, organizations, and even nations have advantages in certain kinds of rivalry under particular conditions. The secret to using advantage is understanding this particularity. You must press where you have advantages and side-step situations in which you do not. You must exploit your rivals’ weaknesses and avoid leading with your own.
Cf asymmetric cost in the arms race
Claims in advertising or sales pitches that a particular IT system or product or training program will provide a competitive advantage are misusing the term since an “advantage” on sale to all comers is a contradiction in terms.
It must have taken iron nerve to wait years for the strategy to work. “You are still looking five to ten years ahead?” I query. “It is one of the big benefits of being a private company. When I first bought these lands from major oil companies, they were looking ahead one quarter or one year. They wanted to get the assets ‘off their books’ to make their financial ratios look better. We can do more with these businesses because we don’t suffer the crazy pressures that are put on a public company.”
Long ball creating unique assets, again !
The silver machine’s advantage gives it value, but the advantage isn’t interesting because there is no way for an owner to engineer an increase in its value. The machine cannot be made more efficient. Pure silver cannot be differentiated. One small producer cannot pump up the global demand for silver. You can no more increase the value of the silver machine than you can, by yourself, engineer an increase in the value of a Treasury bond. Therefore, owning this advantage is no more interesting than owning a bond.
An advantage is “interesting” only if there are ways to increase its value via strategy
Despite all the emphasis on “competitive advantage” in the world of business strategy, you cannot expect to make money—to get wealthier—by simply having, owning, buying, or selling a competitive advantage. The truth is that the connection between competitive advantage and wealth is dynamic. That is, wealth increases when competitive advantage increases or when the demand for the resources underlying it increases.
In particular, increasing value requires a strategy for progress on at least one of four different fronts:
- deepening advantages
- broadening the extent of advantages
- creating higher demand for advantaged products or services, or
- strengthening the isolating mechanisms that block easy replication and imitation by competitors.
First, management may mistakenly believe that improvement is a “natural” process or that it can be accomplished by pressure or incentives alone.
As Frank Gilbreth pointed out in 1909, bricklayers had been laying bricks for thousands of years with essentially no improvement in tools and technique. By carefully studying the process, Gilbreth was able to more than double productivity without increasing anyone’s workload. By moving the supply pallets of bricks and mortar to chest height, hundreds or thousands of separate lifting movements per day by each bricklayer were avoided. By using a movable scaffold, skilled masons did not have to waste time carrying bricks up ladders. By making sure that mortar was the right consistency, masons could set and level a brick with a simple press of the hand instead of the time-honored multiple taps with a trowel.
Gilbreth’s lesson, still fresh today, is that incentives alone are not enough. One must reexamine each aspect of product and process, casting aside the comfortable assumption that everyone knows what they are doing.
Need a process to improve the process.
Extending an existing competitive advantage brings it into new fields and new competitions. For example, cell phone banking is a growing phenomenon outside of the United States, especially in the less developed countries. eBay holds substantial skills in payment systems embedded in its PayPal business. If eBay could build on these to create a competitive advantage in cell phone payment systems, it would be extending a competitive advantage.
Extending a competitive advantage requires looking away from products, buyers, and competitors and looking instead at the special skills and resources that underlie a competitive advantage. In other words, “Build on your strengths.”
This hits home so hard for me right now… How can I apply my marketing / infoproduct skills to more promising opportunities outside of dating ?
Extensions based on proprietary know-how benefit from the fact that knowledge is not “used up” when it is applied; it may even be enhanced. By contrast, extensions based on customer beliefs, such as brand names, relationships, and reputation, may be diluted or damaged by careless extension. Although great value can sometimes be created by extending these resources, a failure in the new arena can rebound to damage the core.
Is the internet a bigger deal than electricity ?
Yet, all in all, the last fifty years’ changes have had a smaller impact on everyday life and the conduct of business than did the momentous changes that occurred from 1875 to 1925. Historical perspective helps you make judgments about importance and significance.
When change occurs, most people focus on the main effects—the spurts in growth of new types of products and the falling demand for others. You must dig beneath this surface reality to understand the forces underlying the main effect and develop a point of view about the second-order and derivative changes that have been set into motion.
For example, when television appeared in the 1950s it was clear that everyone would eventually have one and that “free” TV entertainment would provide strong competition to motion pictures. A more subtle effect arose because the movie industry could no longer lure audiences out of their homes with “just another Western.” Traditional Hollywood studios had been specialized around producing a steady stream of B-grade movies and did not easily adapt. By the early 1960s, movie attendance was shrinking rapidly. What revived Hollywood film was a shift to independent production, with studios acting as financiers and distributors. Independent producers, freed from the nepotism and routines of the traditional studio, could focus on assembling a handpicked team to make a film that might be good enough to pull an audience off of their family-room sofas.
Thus, a second-order effect of television was the rise of independent film production.
Harder to see second order effects. For this reason, they are a much bigger opportunity
Thus, software’s advantage comes from the rapidity of the software development cycle—the process of moving from concept to prototype and the process of finding and correcting errors. If engineers never made mistakes, the costs of achieving a complex design in hardware and software might be comparable. But given that they do make mistakes, software became the much-preferred medium (unless the cutting-edge speed of pure hardware was required).
What is actually surprising about the modern computer industry is not the network of relationships but the absence of the massively integrated firm doing all the systems engineering—all of the coordination—internally. The current web of “relationships” is the ghostly remnant of the old IBM’s nerve, muscle, and bone.
It is hard to show your skill as a sailor when there is no wind. Similarly, it is in moments of industry transition that skills at strategy are most valuable.
An attractor state provides a sense of direction for the future evolution of an industry. There is no guarantee that this state will come to be, but it does represent a gravity-like pull. The critical distinction between an attractor state and many corporate “visions” is that the attractor state is based on overall efficiency rather than a single company’s desire to capture most of the pie. The “IP everywhere” vision was an attractor state because it was more efficient and eliminated the margins and inefficiencies attached to a mishmash of proprietary standards.
One type of accelerant is what I call a demonstration effect—the impact of in-your-face evidence on buyer perceptions and behavior. For example, the idea that songs and videos were simply data was, for most people, an intellectual fine point until Napster. Then, suddenly, millions became quickly aware that a three-minute song was a 2.5 megabyte file that could be copied, moved, and even e-mailed at will.
News media can be differentiated in three basic dimensions: territory (world, national, regional, local), frequency (hourly, daily, and so on), and depth (headline, feature story, in-depth expert analysis). I believe that the attractor state for news contains specialists along each of these dimensions rather than generalists trying to be all things to all people. With electronic access to information, there is simply no good reason to continue to bundle local, national, and world news together and add weather, sports, comics, puzzles, opinion, and personal advice to the mix. I believe that as we move toward this attractor state, general-purpose daily wide-circulation newspapers will fade away. Local news and more specialized news media will continue to exist and even flourish. The strategic challenge for the New York Times and the Chicago Tribune is not “moving online” or “more advertising,” but unbundling their activities.
Entropy makes it necessary for leaders to constantly work on maintaining an organization’s purpose, form, and methods even if there are no changes in strategy or competition.
Successful strategies often owe a great deal to the inertia and inefficiency of rivals.
An organization’s greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia. In such a situation, organizational renewal becomes a priority. Transforming a complex organization is an intensely strategic challenge.
The first step in breaking organizational culture inertia is simplification. This helps to eliminate the complex routines, processes, and hidden bargains among units that mask waste and inefficiency. Strip out excess layers of administration and halt nonessential operations—sell them off, close them down, spin them off, or outsource the services. Coordinating committees and a myriad of complex initiatives need to be disbanded. The simpler structure will begin to illuminate obsolete units, inefficiency, and simple bad behavior that was hidden from sight by complex overlays of administration and self-interest.
After the first round of simplification, it may be necessary to fragment the operating units. This will be the case when units do not need to work in close coordination—when they are basically separable. Such fragmentation breaks political coalitions, cuts the comfort of cross-subsidies, and exposes a larger number of smaller units to leadership’s scrutiny of their operations and performance. After this round of fragmentation, and more simplification, it is necessary to perform a triage. Some units will be closed, some will be repaired, and some will form the nuclei of a new structure. The triage must be based on both performance and culture—you cannot afford to have a high-performing unit with a terrible culture infect the others.
Simplify the organization to make the problem clear, ie : easier to attack.
These norms are established, held, and enforced daily by small social groups that take their cue from the group’s high-status member—the alpha. In general, to change the group’s norms, the alpha member must be replaced by someone who expresses different norms and values. All this is speeded along if a challenging goal is set. The purpose of the challenge is not performance per se, but building new work habits and routines within the unit.
Entropy is a great boon to management and strategy consultants. Despite all the high-level concepts consultants advertise, the bread and butter of every consultant’s business is undoing entropy—cleaning up the debris and weeds that grow in every organizational garden.
In general, if you have a “me-too” product, you prefer fragmented retail buyers. On the other hand, if you have a better product, a powerful buyer such as Dell can help it see the light of day.
A surface reading of history makes it look like 3dfx did itself in with too many changes of direction. The deeper reality was that Nvidia’s carefully crafted fast-release cycle induced 3dfx’s less coordinated responses. As Hannibal did to Rome at Cannae, Nvidia enticed its rival into overreaching.
An organization creates pools of proprietary functional knowledge by actively exploring its chosen arena in a process called scientific empiricism. Good strategy rests on a hard-won base of such knowledge, and any new strategy presents the opportunity to generate it. A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment.
One of the most important resources a business can have is valuable privileged information—that is, knowing something that others do not. There is nothing arcane or illicit about such information—it is generated every day in every operating business. All alert businesspeople can know more about their own customers, their own products, and their own production technology than anyone else in the world. Thus, once Schultz initiated business operations, he began to accumulate privileged information.
Value of being in the game
The creation of new higher-quality alternatives requires that one try hard to “destroy” any existing alternatives, exposing their fault lines and internal contradictions. I call this discipline create-destroy. Trying to destroy your own ideas is not easy or pleasant. It takes mental toughness to pick apart one’s own insights.
In my own case, I rely on outside help—I invoke a virtual panel of experts that I carry around in my mind. This panel of experts is a collection of people whose judgments I value. I use an internal mental dialogue with them to both critique my own ideas and stimulate new ones. I try to do this before putting my ideas before others.
Human tendency is to hold on to the first idea. Need a conscious process to counter it.
The panel of experts trick works because we are adept at recognizing and comprehending well-integrated human personalities. Thinking through how a particular well-remembered expert might respond to a problem can be a richer source of criticism and advice than abstract theories or frameworks.
See Napoleon Hill’s Board of invisible counselors
Good judgment is hard to define and harder still to acquire. Certainly some part of good judgment seems to be innate, connected with having a balanced character and an understanding of other people. Still, I am convinced that judgment can be improved with practice. For that practice to be effective, you should first commit your judgments to writing.
Try to anticipate other peoples reaction .Write it down. Then compare to with what happened. This is a way to highlight your mistakes and improve your judgment.
Social herding presses us to think that everything is OK (or not OK) because everyone else is saying so. The inside view presses us to ignore the lessons of other times and other places, believing that our company, our nation, our new venture, or our era is different. It is important to push back against these biases. You can do this by paying attention to real-world data that refutes the echo-chamber chanting of the crowd—and by learning the lessons taught by history and by other people in other places.
See Charlie Munger’s cognitive biases