Good Strategy Bad Strategy: The Difference and Why It Matters (Book Summary)

Good Strategy

A good strategy is a cohesive response to an important challenge and contains three elements:

1. Diagnosis: Honest, simple acknowledgement of the critical obstacles/challenges in a situation. It is a diagnosis about the meaning of facts and is generally denoted by metaphor, analogy, or reference to a diagnosis or framework that has already gained acceptance.
2. Guiding policy: The approach/method to dealing with the obstacles called out in the diagnosis marking the direction but not the details. A guiding policy creates advantage by anticipating the actions and reactions of others, by reducing the complexity and ambiguity in the situation, by exploiting the leverage inherent in concentrating effort on a pivotal or decisive aspect of the situation, and by creating policies and actions that are coherent, each building on the other rather than canceling one another out.
3. Coherent actions: Feasible, focused, coordinated/interlocking policies, resource commitments/structures, and actions designed to immediately carry out the guiding policy.

Bad strategy

• Fluff: Superficial statement of the obvious with a generous sprinkling of buzzwords (ex: “customer-centric intermediation”)
• Failure to face the challenge either by failing to identify it or by failing to take coordinated action
• Mistaking (ambitious) goals for strategy: Describing a destination (ex: Grow by 50%) is no substitute for developing a comprehensive roadmap for how an entity will achieve its stated goals. Having in in-vogue vision, mission, values, goals, initiatives template filled in without the hard work of diagnosis, guiding policy and coherent actions is bad strategy.
• Bad strategic objectives: Particularly those that fail to address critical issues or those that are impractical.
• Spreading resources - often to placate or payoff internal or external interests
• Having conflicting goals or unconnected targets
• Not being able to say no
• Making decisions by consensus
• Characterizing the challenge as underperformance.
• Attempting two separate deep transformations of a company’s core at once
• Following the crowd

Sources of Strategic Power

A “good strategy” is an approach that magnifies the effectiveness of actions by finding and using sources of power, including but not limited to: leverage, proximate objectives, chain-link systems, design, focus, growth, advantage, dynamics, inertia, and entropy

• Leverage: Leverage involves finding pivot points (ex: imbalance between customer demand/preferences and existing competitors’ ability to serve) and concentrating effort on them.
• Proximate objectives: Proximate objectives are those that are close enough at hand to be feasible. The more uncertain and dynamic the situation, the more proximate a strategic objective must be.
• Chain-link systems: Both excellence and being stuck are reflections of chain-link systems. In situations of excellence, chain-linked activities should form an unusual grouping such that expertise in one does not easily carry over to expertise at the others. For instance, IKEA combines a catalog, in-house design, logistics, in-stock flat pack products, etc. A competitor adopting any one of these would not pose a threat to IKEA. In situations of being stuck, leaders must identify the bottlenecks.
• Design: There is a sharp gain to careful coordination of the parts into a whole. A more tightly integrated design is harder to create, narrower in focus, more fragile in use, and less flexible in responding to change.
• Focus: Example here is Crown Cork & Seal, an aluminum can manufacturer, who applied a focus strategy rooted in being able to provide shorter runs. Though their volume was lower than competitors, they earned outsized profits. The pattern of attacking a segment of the market with a business system supplying more value to that segment than the other players can—is called focus. Here, the word “focus” has two meanings. First, it denotes the coordination of policies that produces extra power through their interacting and overlapping effects. Second, it denotes the application of that power to the right target.
• Growth: Healthy growth is not engineered. It is the outcome of growing demand for special capabilities or of expanded or extended capabilities. It is the outcome of a firm having superior products and skills. Growth based upon substitution (with a new generation of a commodity product) has a clear ceiling and, once the conversion to the substitute has taken place, the growth grinds to a sudden halt. 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.
• Advantage: Advantage is rooted in differences—in the asymmetries among rivals. One example is an “isolating mechanism” such as a patent. More complex forms of isolating mechanisms include reputations, commercial and social relationships, network effects,* dramatic economies of scale, and tacit knowledge and skill gained through experience. 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. One must reexamine each aspect of product and process, casting aside the comfortable assumption that everyone knows what they are doing. Improvements come from reexamining the details of how work is done, not just from cost controls or incentives. Companies that excel at product development and improvement carefully study the attitudes, decisions, and feelings of buyers. If you can continually improve, or simply alter, your methods and products, rivals will have a much harder time with imitation.
• Dynamics: Out of the myriad shifts and adjustments that occur each year, some are clues to the presence of a substantial wave of change and, once assembled into a pattern, point to the fundamental forces at work. 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. The first guidepost demarks an industry transition induced by escalating fixed costs, esp. product development cost. The second calls out a transition created by deregulation. The third highlights predictable biases in forecasting. A fourth marks the need to properly assess incumbent response to change. And the fifth guidepost is the concept of an attractor state which describes how an industry should work in the light of technological forces and the structure of demand; for example, the attractor state for news media contains specialists in the dimensions of territory, frequency, and depth rather than generalists trying to be all things to all people.
• Inertia & Entropy: Inertia is an organization’s unwillingness or inability to adapt to changing circumstances. Weakly managed organizations tend to become less organized and focused. 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. it is dangerous to think that organizational culture can be changed quickly or easily. In general, to change the group’s norms, the alpha member must be replaced by someone who expresses different norms and values. Each quarter, each year, each decade, corporate leadership must work to maintain the coherence of the design. Without constant attention, the design decays.

Tips for Finding & Executing Good Strategy

• Gain new insight into your- and your competitors’ strengths and weakness by questioning conventional wisdom and preconceived ideas. Ex: Wal-Mart broke the conventional wisdom that full-line discount stores needed a population base of at least 100,000. Moreover, Wal-Mart changed the basic unit of management from the store to the network through interlocking: bar codes, integrated logistics, JIT deliveries, low in-store inventory, etc.
• Take an advantageous position that makes imitation extremely difficult (due to fundamental beliefs) or exorbitantly costly (due to ways of operating).
• Strategic objectives should address a specific process or accomplishment, such as halving the time it takes to respond to a customer, or getting work from several Fortune 500 corporations.
• Pull together a small team of people for month to discover the most promising opportunities for your business. The review should include: (a) your competitors (b) your buyers incl. their tastes and behaviors (c) what is changing in your business incl. technology, laws, resource prices (d) internal bottlenecks in the way people work incl. organizational structure (e) how your products are distributed
• 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. 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. A good strategy defines a critical challenge. What is more, it builds a bridge between that challenge and action, between desire and immediate objectives that lie within grasp.
• All analysis starts with the consideration of what may happen, including unwelcome events.
• The simplest business strategy is to use knowledge gleaned by sales and marketing specialists to affect capacity expansion or product design decisions—coordination across functions and knowledge bases.
• The idea that coordination, by itself, can be a source of advantage is a very deep principle.
• Good strategy and good organization lie in specializing on the right activities and imposing only the essential amount of coordination. We should seek coordinated policies only when the gains are very large. Decentralized decision-making fails when either the costs or the benefits of actions are not borne by the decentralized actors.
• It takes leadership and the willingness to absorb short-term losses in the quest for future gains.
• A strategic resource is a kind of property that is fairly long lasting that has been constructed, developed over time, designed, or discovered by a company and that competitors cannot duplicate without suffering a net economic loss.
• A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment. A good business strategy deals with the edge between the known and the unknown. This is the centerpiece of scientific thinking—the idea of refutation. Unless an idea can possibly be proved false by observable fact, it is not scientific.
• An anomaly marks an opportunity to learn something,
• One of the most important resources a business can have is valuable privileged information—that is, knowing something that others do not.
• Starbucks did not vertically integrate to purposefully confuse the competition. It did so in order to be able to mutually adjust multiple elements of its business and to capture the information generated by each element of its business operations. Integration is not always a good idea. When a company can buy perfectly good products and services from outside suppliers, it is usually wasteful to go through the expense and trouble.
• Generate alternative views. Our minds dodge the painful work of questioning and letting go of our first early judgments. A new alternative should flow from a reconsideration of the facts of the situation, and it should also address the weaknesses of any already developed alternatives.
• In strategy work, knowledge is necessary but not sufficient. There are many people with deep knowledge or experience who are poor at strategy. To guide your own thinking in strategy work, you must cultivate three essential skills or habits. First, you must have a variety of tools for fighting your own myopia and for guiding your own attention. Second, you must develop the ability to question your own judgment. If your reasoning cannot withstand a vigorous attack, your strategy cannot be expected to stand in the face of real competition. Third, you must cultivate the habit of making and recording judgments so that you can improve.
• Shift your attention from what is being done to why it is being done, from the directions chosen to the problems that these choices address.
• 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.
• Jobs’s basic operating principles have become the stuff of legend: (1) imagine a product that is “insanely great,” (2) assemble a small team of the very best engineers and designers in the world, (3) make the product visually stunning and easy to use, pouring innovation into the user interface, (4) tell the world how cool and trendy the product is with innovative advertising.
• Good strategies are usually “corner solutions.” That is, they emphasize focus over compromise. They focus on one aspect of the situation, not trying to be all things to all people.
• A quick summary is that a terrible industry looks like this: the product is an undifferentiated commodity; everyone has the same costs and access to the same technology; and buyers are price sensitive, knowledgeable, and willing to switch suppliers at a moment’s notice to get a better deal.
• Five intertwined errors in human judgment and behavior that brought on the 2009 financial collapse: (1) engineering overreach – building systems who failure modes & failure consequences are unknown (2) smooth-sailing fallacy – assuming lack of recent volatility means there is no risk (3) working under risk-seeking incentives where you profit when things go well and others lose when things go poorly (4) social herding – assuming others know what they are doing (5) inside view – ignoring related pertinent data and believing “this case is different”
• An important virtue of a good leader is putting the situation in perspective and having cool-minded judgment.

2 Good Summaries