Despite the roar of voices wanting to equate strategy with ambition, leadership , “vision”, planning, or the economic logic of competition, strategy is none of these. 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.
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.
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 high-stakes challenge.
Many people assume that a strategy is a big-picture overall direction, divorced from any specific action. But defining strategy as broad concepts, thereby leaving out action, creates a wide chasm between “strategy” and “implementation.” If you accept this chasm, most strategy work becomes wheel spinning.
Part 1: Good and Bad Strategy
A good strategy doesn’t just draw on existing strength; it creates strength through the coherence of its design.
Andy Marshall
“Our defense planning had become driven by the annual budgeting process. The 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.”
This fascinating analysis of the situation worked to redefine “defense” in new terms – a subtle shift in point of view. It argued that “in dealing effectively with the other side, a nation seeks opportunities to use or more distinctive competences in such a way as to develop competitive advantage-both in specific areas and overall.” It then went on the explain that the crucial area of competition was technology because the United States had more resources and better capabilities in that area. And, most important, it argued that having a true competitive strategy meant engaging in action that imposed exorbitant costs on the other side. In particular, it recommended investing in technologies that were expensive to counter and where the counters did not add to Soviet offensive capabilities. For instance, increasing the accuracy of missiles or the quietness of submarines forced the Soviet Union to spend scarce resources on counters without increasing the threat to the United States. Investments in systems that made Soviet systems obsolete would also force them to spend, as would selectively advertising dramatic new technologies. […] 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.
To detect bad strategy, look for one or more of its four major hallmarks;
1. Fluff (words that give the illusion of high level thinking)
2. Failure to face the challenge (can’t evaluate strategy against an undefined challenge)
3. Mistaking goals for strategy (statements of desire rather than plans to overcome)
4. Bad strategic objectives (not addressing critical issues or impractical)
If you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have either a stretch goal, a budget, or a list of things you wish would happen.
We have a different type of ritualized formalism for producing “strategic plans.” The current fill-in-the-blank template starts with a statement of “vision,” then a “mission statement” or a list of “core values,” then a list of “strategic goals,” and then, finally, a list of “initiatives.”
DARPA
The Defense Advanced Research Projects Agency (DARPA) works to achieve radical technological innovation to support national security. As a counterpoint to Harvestor, DARPA’s strategy is based on clear-sighted recognition of the nature of the challenge. Here is DARPA’s own statement of a fundamental problem its strategy address:
“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; (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.
To attack this challenge, DARPA focuses on projects the military services see as too risky or too removed from their current missions. It tries to imagine what commanders will want in the future rather than what they are calling for today, but it restricts its work to that conducted by very talented people with very good ideas. […]
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 4-6 years to limit empire building and to bring in fresh talent. The expectation is that a new program manager 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.”
DAPRA’s surprising strategy has a shape and structure common to all good strategy. It follows from careful definition of the challenge. It anticipates the real-world difficulties to be overcome. It eschews fluff. It creates policies that concentrate resources and action on surmounting those difficulties.
To obtain higher performance, leaders must identify the critical obstacles to forward progress and then develop a coherent approach to overcoming them. This may require product innovation, or new approaches to distribution, or a change in organizational structure. Or it may exploit insights into the implications of changes in the environment – in technology, consumer tastes, law, resource prices, or competitive behavior. The leader’s responsibility is to decide which of these pathways will be the most fruitful and design a way to marshal the organization’s knowledge, resources, and energy to that end. Importantly, opportunities, challenges and changes don’t come along in nice annual the need for true strategy work is episodic, not necessarily annual.
A long list of “things to do,” often mislabeled as “strategies” or “objectives,” is not a strategy
If the leader’s strategic objectives are just as difficult as the original challenges, there has been little value added by the strategy.
Strategy involves focus and, therefore, choice. And choices means setting aside some goals in favor of others. When this hard work is not done, weak amorphous strategy is the result.
Only the prospect of choice inspires peoples’ best arguments about the pluses of their own proposals and the negatives of others’. As in the law, disciplined conflict calls forth stronger evidence and reasoning.
The general outline (of charisma leadership) goes like this: the transformational leader (1) develops or has a vision, (2) inspires people to sacrifice (change) for the good of the organization, and (3) empowers people to accomplish the vision. […] This conceptual scheme has been hugely popular with college-educated people who have to manage other college-educated people. It satisfies their sense that organization should somehow be forced to change and improve while also satisfying their contradictory sense that it is awkward to tell other people what to do. Whatever you think about this definition of leadership, a problem arises when it is confused with strategy. Leader and strategy may be joined in the same person, but they are not the same thing. Leadership inspires and motivates self-sacrifice. Change, for example, require painful adjustments, and good leadership helps people fell more positively about making those adjustments. Strategy is the craft of figuring out which purposes are both worth pursing and capable of being accomplished.
This class of verbiage is a mutant offspring of the concept of charismatic, then transformational, leadership. In reality, these are the flat-footed attempts of organizational men to turn the magic of personal charisma into a bureaucratic product — charisma-in-a-can.
This statement is very appealing to many people and, at the same time, is quite obviously untrue. 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.
Kernel
The kernel of a strategy contains three elements
1. A diagnosis
2. A guiding policy
3. A set of coherent actions
Diagnosis
- Key question: “What’s going on here?”
- Making the diagnosis an explicit element of the strategy allows the rest of the strategy to be revisited and changed as circumstances change.
- The diagnosis for the situation should replace the overwhelming complexity of reality with a simpler story, a story that calls attention to its crucial aspects.
Guiding Policy
- Good guiding policies are not goals or visions or images of desirable end states. Rather, they define a method of grappling with the situation and ruling out a vast array of possible actions.
- Without a diagnosis, one cannot evaluate alternative guiding policies. Without working through to at least the first round of action one cannot be sure the guiding policy can be implemented. Good strategy is not just “what” you are trying to do. It is also “why” and “how” you are doing it.
Coherent Action
- Strategic actions that are not coherent are either in conflict with one another or taken in pursuit of unrelated challenges.
- The idea that coordination, by itself, can be a source of advantage is a very deep principle. It is often underappreciated because tend to think of coordination in terms of continuing mutual adjustments among agents. Strategic coordination, or coherence, is not ad hoc mutual adjustment. It is coherences imposed on a system by policy and design.
- Another powerful way to coordinate actions is by the specification of a proximate objective.
- Strategy is visible as coordinated action imposed on a system. When I say strategy is “imposed,” I mean just that. It is an exercise in centralized power, used to overcome the natural workings of a system. This coordination is unnatural in the sense that it would not occur without the hand of strategy. The idea of centralized direction may set off warning bells in a modern educated person. Why does it make sense to exercise centralized power when we know that many decisions are efficiently made on a decentralized basis? […] Decentralized decision making cannot do everything. In particular, it may fail when either the costs or benefits are not borne by the decentralized actors.
- There will be costs to demanding coordination, because it will ride roughshod over economies of specialization and more nuanced local responses. […] Good strategy and good organization lie in specializing on the right activities and imposing only the essential amount of coordination.
Part 2: Sources of Power
Sources of power used in good strategies: leverage, proximate objectives, chain-link systems, design, focus, growth, advantage, dynamics, inertia and entropy.
An important duty of any leader is to absorb a large part of that complexity and ambiguity, passing on a simpler problem — one that is solvable.
The more dynamic the situation, the poorer your foresight will be. Therefore, the more uncertain and dynamic the situation, the more proximate a strategic objective must be. The proximate objective is guided by forecasts of the future, but the more uncertain the future, the more its essential logic is that of “taking a strong position and creating options,” not of looking far ahead.
Quality matters when quantity is an inadequate substitute.
Many effective strategies are more designs than decisions — are more constructed than chosen.
Corporate leaders seek growth for many reasons. They may (erroneously) believe administrative costs will fall with size. A poor, but common, reason for acquisitions is to move key executives to the periphery rather than let them go. The leaders of larger firms tend to get paid more. And, in a decentralized company, making acquisitions is a lot more fun than reading reports on divisional performance.
First, management may mistakenly believe that improvement is a “natural” process or that it can 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. […] One must reexamine each aspect of product and process, casing aside the comfortable assumption that everyone knows what they are doing.
The most obvious approach to strengthening isolating mechanisms is working on stronger patents, brand-name protections, and copyrights. […]
When an isolating mechanism is based on the collective know-how of groups, it may be strengthened by reducing turnover. […]
Another broad approach to strengthening isolating mechanisms is to have a moving target for imitators.
Much of academic strategy theory concerns more and more intricate explanations for why certain types of economic high ground are valuable. But such discussions sidestep an even more important question: how do you attain such an advantage in the first place? […] One way to find fresh undefended high ground is by creating it yourself through pure innovation. […] The other way to grab high ground is–the way that is my focus here–to exploit a wave of change. […] Leaders who stay “above the details” may do well in stable times, but riding a wave of change requires an intimate feel for its origins and dynamics.
The origin of Andy Grove’s inflection point was Intel’s own product–the microprocessor. The modularization of the computer industry came about as each major component was able to contain its own microprocessor–each part became ‘smart.’ […] Smart components operating within a de facto standard operating system meant that the job of systems integration became almost trivially simple. The skills at systems integration that IBM and DEC had built up were no longer needed. […] With the glue of proprietary systems engineering no longer so important, the industry deconstructed itself.
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. During the relatively stable periods between episodic transitions, it is difficult for followers to catch the leader, just as it is difficult for one of the two or three leaders to pull far ahead of the others.
Fortunately, a leader does not need to get it totally right — the organization’s strategy merely has to be more right than those of its rivals. If you can peer into the fog of change and see 10% more clearly than others see, then you may gain an edge.
Industry transition guide posts:
1. Rising Fixed Costs –> force consolidation in the industry because only the largest can over these fixed charges.
2. Deregulation –> newly deregulated players chased what used to be the more profitable segments long after the differential vanished. This happened because of the inertia in corporate routines and mental maps of the terrain, and because of poor cost data.
3. Predictable biases in forecasting –> Ex: people rarely predict that a business trend will peak and then decline. Ex: in a time of transition, the standard advice offered by consultants and analysts will be to adopt the strategies of the incumbents that are on the verge of disruption
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.
As I developed working relationships at AT&T, some high-level managers let me in on what they saw as an embarassing secret. AT&T wasn’t competent at product development. Yes, the company the proud owner of Bell Labs; the inventor of the transistor, the C programming language, and Unix; and was marvelous place that probed deeply into the fundamentals of nature. But there was no competence within AT&T at making working consumer products. One story was told concerned cellular phones. Starting in 1947, Bell Labs had developed the basic ideas underlying mobile telephony. However, the first market test, in 1977, had to be undertaken using Motorola’s equipment.
The first tep in breaking organizational culture inertia is simplification. […] After the first round of simplification, it may be necssary to fragment the operating units. […] Such fragmentation breaks political coalitions, cuts the comfort of cross-subsidies, and exposes a larger number of smaller units to leaderships’s scrutiny of their operations and performance. After this round of fragmentation, and more simplification, it is necessary to perform a triage. […] 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. […] Once the bulk of the operating units are working well, it may then be time to install a new overlay of coordinating mechanisms, reversing some of the fragmentation that used to break inertia.
A lack of response is not always an indication of sticky routines or a frozen culture. A business may choose to not respond to change or attack because responding would undermine still-valuable streams of profit. Those streams of profit persist because of their customers’ inertia — a form of inertia by proxy. […] The apparent inertia of the telephone companies was actually inertia by proxy, induced because their customers were so slow to switch suppliers, even in the face of price differences. […] Inertia by proxy disappears when the organization decides that adapting to changed circumstances is more important than hanging on to old profit streams.
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.
Nvidia
Faced with the failure of the company’s first product and the sudden rise of 3dfx, Jen-Hsun Huang reformulated the company’s strategy. Key inputs came from a temporary technical advisory board made up of both insiders and expert outsiders. The new strategy was a sharp change in direction. Instead of multimedia, the company would focus on 3-D graphics for desktop PCs. Instead of its initial proprietary apparoch to graphics, the company would embrace the SGI-based triangle method. Abou the only thing that stayed unchanged Nvidia’s commitment to being a “fabless” chip company, focusing on design and outsourcing fabrication.
[…]
This is the point where a bad strategist would have wrapped the concept of a faster development cycle in slogans about speed, power, and growth, and then sought to cash in by taking the company public. Instead, the Nvidia teacm designed a set of cohesive policies and actions turn guiding policy into reality. The first tep in executing the guiding policy was the establishment of three separate development teams. Each would work to an 18 month start-to-market cycle. With overlapping schedules, the three teams would deliver a new product every six months.
Part 3: Thinking Like Strategist
Good strategy is built on functional knowledge about what works, what doesn’t, and why. Generally available functional knowledge is essential but because it is available to all, it can rarely be decisive. The most precious functional knowledge is proprietary, available only to your organization. An organization creates pools of proprietary knowledge by actively exploring its chosen arena in a process called scientific empiricism.
The delicacy in the situation was that Schulz’s proprietary information was only a glimmer in his mind, a mood, a feeling. Others, exposed to exactly the same information and experiences, did not have this insight or feeling. The privacy of his insight was both blessing and curse. Were it easily shared with others, Schultz himself would have been irrelevant. But because it could not be fully shared, it was difficult to convince others to back the project.
Once Schultz initiated business operations, he began to accumulate privileged information.
“Mr. Carnegie,” Tylor said, ” would advise you to make a list of the ten most important things you can do. And then, start doing number one.”
Our own myopia is the obstacle common to all strategic situations. Being strategic is bing less myopic – less shortsighted – than others. You must perceive and take into account what other do not, be they colleagues or rivals. Being less myopic is not the same as pretending you can see the future. You must work with the facts on the ground, not the vague outlines of the distant future.
I invoke a virtual panel of experts that I carry around in my mind. This panel of experts is a collection of people whose judgements i value. I use an internal mental dialogue with them to both critique my own idea s and stimulate new ones.
Good judgement 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.
Keeping your head: beware five intertwined errors in human judgement of behavior:
- engineering overreach: systems whose failure modes and consequences are opaque
- smooth-sailing fallacy / recency bias
- risk-seeking incentive: socialized down-side, privatized upside. Lack of skin in the game.
- social herding
- inside view: “we’re special here, this time is different”