Following up on my recent review of Good Strategy/Bad Strategy, I gave the book a complete re-read and I am now solidly convinced it is a 4/5 title worth the extra effort. There is a lot here to unpack, I ended up taking about five pages of notes as I read and tried to put major concepts into my own words this time around. I am tempted to just copy a list of bullet points but I think that’d be exhausting to read, so instead I will take a fragmented narrative approach.
The Good, The Bad
Good strategy is defined as designing a coordinated and focused group of actions against a critical factor in a given situation (business, military, political, etc.) Bad strategy can be recognized by its hallmarks:
- ignores problems or obstacles in the way of intended action
- ignores choice or focus in favor of attempting to accede to conflicting demands
- embraces language of broad goals, ambition, vision and values (generic versus specific)
A good strategy “selects the path” of how, why and where leadership and determination are to be applied. This path is sketched out with the “kernel”, which consists of three important parts, in this order:
- a diagnosis of the challenge to be overcome
- a guiding policy describing the area of action to focus on
- a set of coherent actions that will be taken to overcome the challenge
A lot of the strength of strategy is gained simply by having a coordinated design for focused action on a single objective, a discipline many competing organizations will lack. Most complex organizations make the mistake of spreading rather than concentrating resources. Leaders need to learn how to say “No!” to a wide variety of competing interests and actions. With focus, one can “use your relative advantages to impose out-of-proportion costs on the opposition and complicate his problem of competing with you.”
Digging in on bad
The author actually has four signposts for bad strategy:
- fluff, the illusion of high-level thinking created by manipulating language
- failure to face the challenge, providing no way to direct action at an undefined entity
- mistaking goals for strategy, stating mere desires rather than creating plans for achievement
- bad strategic objectives, sabotaging an effort by impracticality or ignorance of critical restraints
In short, “bad strategy is long on goals and short on policy or action.”
Whereas good strategy seeks simplicity and utilizes heuristics to make complex phenomena understandable and addressable, bad strategy purposefully obscures meaningful dynamics by adding layers and complexity and minutiae to the discussion. Many bad strategies reveal themselves as exhaustive lists of hopes, dreams or things people would like to see done (such as, “Create a strategy for X”, a seeming meta-strategy!)
A strategy must define the primary challenge and the major obstacles to a plan for overcoming it.
One place to look to for applying strategy is the part of your business that is changing, as there may be an opportunity here to get a jump on the competition. While resource plans are valuable because they ensure resources arrive as needed with expected business operations, they are not the same as a strategy which addresses what is dynamic in an operation. As a strategy is a choice of what goals to pursue, it has implications for sub-goals that permeate the different parts of the organization in order for the main goals to be achieved. But goals themselves are not a strategy, because there are many potential ways to achieve a specific goal; strategy is choosing which path to take and why.
If a strategy can’t bridge the gap between objectives and actions necessary to achieve them, it is merely wishful thinking. Underperformance is a result, not a challenge to be met strategically. Strategy needs to address the specific challenges that result in underperformance as an outcome.
Some common sources of bad strategy:
- avoiding the pain of choice; facing the fact that you must displease someone
- template-strategy temptation; an appealing substitute for actual analysis
- New Thought; believing positivity and mindset trump all other real factors in a situation
If you propose a strategy and find everyone is immediately bought in, you probably haven’t made a hard choice which suggests you haven’t actually provided a strategy. Strategies have clear winners and losers in terms of existing and potential interest groups.
Revisiting the core of good strategy
To repeat, the strategy kernel consists of three parts, contemplated in order:
- a simplifying diagnosis of the problem
- a guiding policy directed at obstacles identified in the diagnosis
- a set of coordinated, coherent actions to carry out the guiding policy and address the problem
The guiding policy should be aimed at a source of leverage or should build on existing advantages. It needs to address “how” the diagnosis will be treated. The diagnosis itself should call attention to the most crucial facts– on what items does the balance between life or death hang? There are a few ways the guiding policy helps to create advantage:
- anticipating actions and reactions (internally and externally)
- reducing complexity and ambiguity about how to proceed and what is or is not within the scope of action
- exploiting leverage through concentrated effort
- building coherence in related actions and decisions so that they serve to reinforce one another
Coherence means that every action strengthens the others and complements them in some way; they do not remain distinct or in conflict with one another. Coherence is the application of centralized intelligence imposed on the “natural” workings of a system. Good strategy imposes only the essential coordination necessary to create large gains, while allowing specialization and decentralization in all else.
Foresight diminishes with increased time (uncertainty about the future) to an objective, so proximate objectives are most important when facing the highest amount of uncertainty.
Chain-link systems are one’s whose efficacy is defined by their weakest link. The threshold for improving the system is usually holistic in nature, as the weakest link “shifts” as the system is transformed.
Strategy as a design problem implies the need to make mutual adjustments, resulting in high peaks to gains or sharp costs and losses if wrong. Tighter integration of design requires higher costs/tradeoffs. The degree of integration in a design needed is proportional to the intensity of the challenge faced.
It is human nature to identify current profit with current actions, when really the seeds of present loss and profit were sown long ago.
To identify a company’s strategy, start by examining the business models of competitors. You can also study the business’s policies which are different from the competition and try to think about what that implies about what kind of coordination they’re aiming at.
Forgetting about whether traditional competencies apply to new paradigms is a classic strategic misstep.
Growth, by itself and for itself, is not a strategy. Growth doesn’t create value by acquisition unless you buy below fair value or can increase the value through operational control. Healthy growth usually comes commingled with higher market share and higher profitability as a result of greater cleverness, creativity, efficiency or skill. It can’t be engineered by an acquisition or a merger.
Thinking about competitive advantage
Advantage in competitive settings is rooted in differences which create asymmetries. No one has advantage in everything, so choose your battles wisely.
Competitive advantage is “interesting” when one can find ways to increase its value by creating greater strategic coherence. Having a competitive advantage by itself isn’t valuable because you’re likely to pay a premium to own it, but if you know how to increase or enhance the advantage you gain, then it is valuable to get control of it. Some ways you can increase the value of competitive advantages you possess via strategy include:
- deepen the advantage
- broaden the extent of the advantage
- create higher demand for advantaged products or services
- strengthen the isolating mechanisms that block competition
Advantage is deepened by increasing value to the buyer over cost, reducing expenses involved in providing the advantaged product or service, or both. To find ways to reduce costs, start by closely examining how work is being done in provisioning the product or service in question (ie, sources of waste or inefficiency in process).
Extending advantage means using it in new fields and against new competitors. Exploiting a wave of change means adapting your business and organization to where the high ground is shifting to before it can be occupied by others. To recognize industry change, consider these potential forms as guideposts:
- rising fixed costs, often leading to consolidation
- deregulation, price fixing and subsidies are eliminated creating “cost chaos”
- prediction biases, trends and industry change rarely follow expected, smooth patterns but are more random
- incumbent response, successful firms of the old paradigm will dig in and try to resist change
- attractor states, think about how the industry “should” work as it moves to a state of higher efficiency
The inertia (unwillingness to change) of rivals can reveal the most effective strategic opportunities. Looking for inertia within your own operation can often result in the same opportunity, if you’re the first competitor to break free of your own orbit! This strategic opportunity is usually centered around renewal and refocus generated by a new guiding policy in a complex organization.
Inertia typically arises due to:
- routine, firms can insist on playing by old rules in a new game because it worked in the past
- culture, attitudes and behaviors seen as core to the organization’s identity, often masked by complexity
- proxy, customer inertia translates into business inertia through still-profitable business lines
In responding to change, don’t make the mistake of building strategies around assumed competencies which aren’t actually present.
Entropy can eat up profitability; de-clutter your organization and operation for increased profitability.
Thinking about thinking
When studying change and theorizing about a response, pay attention to anomalies (situations where experience doesn’t confirm predictions or theories), which represent the frontier of knowledge. Resolving anomalies is where strategic advantage lies.
Improve your diagnosis to improve your strategy. Define problems in need of solutions. Attempt to undermine proposed alternatives to find their weak points. Create a virtual panel of experts and consult with them by imagining what their commentary would be on a specific proposal or circumstance. Pre-commit your judgment in writing to develop the habit of making decisions and not re-rating your analysis after the fact.