Introduction: Overwhelming Obstacles

• The core of strategy work: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.
• A leader’s most important responsibility is identifying the biggest challenges to forward progress and devising a coherent approach to overcoming them.
• 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.
• 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.
• A good strategy includes a set of coherent actions. They are not “implementation” details. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.
• Executives who complain about “execution” problems have usually confused strategy with goal setting.
• A good 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.
• Bad strategy is more than just the absence of good strategy. Bad strategy may actively avoid analyzing obstacles because a leader believes that negative thoughts get in the way. Leaders may create bad strategies by mistakenly treating strategy work as an exercise in goal setting rather than problem solving.

Part I: Good and Bad Strategy

Good Strategy: having a coherent strategy — one that coordinates policies and actions.

A good strategy doesn’t just draw on existing strength; it creates strength through the coherence of its design. Most organizations of any size don’t do this. Rather, they pursue multiple objectives that are unconnected with one another or, worse, that conflict with one another.

Chapter 1: Good Strategy is Unexpected

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.

Chapter 2: Discovering Power

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.

Use your relative advantages to impose out-of-proportion / asymmetric / exorbitant costs on the opposition and complicate his problem of competing with you.

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.

Chapter 3: Bad Strategy

Bad Strategy Components

Fluff – Fluff is a form of gibberish masquerading as strategic concepts or arguments. It uses “Sunday” words (words that are inflated and unnecessarily abstruse) and apparently esoteric concepts to create the illusion of high – level thinking.

Failure to face the challenge. Bad strategy fails to recognize or define the challenge. When you cannot define the challenge, you cannot evaluate a strategy or improve it.

Mistaking goals for strategy. Many bad strategies are just statements of desire rather than plans for overcoming obstacles.

Bad strategic objectives. A strategic objective is set by a leader as a means to an end. Strategic objectives are “bad” when they fail to address critical issues or when they are impracticable.

Bad strategies are 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.

• If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy. And if you cannot assess a strategy’s quality, you cannot reject a bad strategy or improve a good one.
• 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.

A strategy is like a lever that magnifies force.

• What key strength are you building on or what change in the industry can open up new opportunities? Can you clarify what the point of leverage might be here, in your company?
• 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.
• 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 leader may successfully identify the key challenge and propose an overall approach to dealing with the challenge. But if the consequent strategic objectives are blue sky, not much has been achieved.
• The purpose of a good strategy is to offer a potentially achievable way of surmounting a key challenge. 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.
• 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 a good strategy.

Chapter 4: Why So Much Bad Strategy?

One common reason for choosing avoidance is the pain or difficulty of choice. When leaders are unwilling or unable to make choices among competing values and parties, bad strategy is the consequence.

A second pathway to bad strategy is the siren song of template-style strategy — filling in the blanks with vision, mission, values, and strategies. This path offers a one – size – fits – all substitute for the hard work of analysis and coordinated action.

A third pathway to bad strategy is New Thought — the belief that all you need to succeed is a positive mental attitude.

When a strategy works, we tend to remember what was accomplished, not the possibilities that were painfully set aside.

• “If we got kicked out and the board brought in a new CEO, what do you think he would do?”

When organizations are unable to make new strategies – when people evade the work of choosing among different paths into the future – then you get vague mom-and- apple-pie goals that everyone can agree on. Such goals are direct evidence of leadership’s insufficient will or political power to make or enforce hard choices. Put differently, universal buy – usually signals the absence of choice.

The general outline 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.

The template generally looks like this: The Vision: Fill in your unique vision of what the school / business / nation will be like in the future. Currently popular unique visions are to be “the best” or “the leading” or “the best known.”

For example,

• Dow Chemical’s vision is “To be the most profitable and respected science – driven chemical company in the world.”  Enron’s vision was “to become the world’s leading energy company.”
• The Mission: Fill in a high – sounding politically correct statement of the purpose of the school / business / nation. Dow’s mission is “To passionately innovate what is essential to human progress by providing sustainable solutions to our customers.”
• The Values: Fill in a statement describing the company’s values. Make sure they are noncontroversial. Dow’s values are “Integrity, Respect for People, and Protecting Our Planet.” Enron’s were “Respect, Integrity, Communication and Excellence.”
• The Strategies: Fill in some aspirations / goals but call them strategies. For example, Dow’s corporate strategies are “Preferentially invest in a portfolio of technology – integrated, market – driven performance businesses that create value for our shareholders and growth for our customers. Manage a portfolio of asset – integrated building block businesses to generate value for our downstream portfolio.”

Jack Welch said: “The first step of making strategy real is figuring out the big ‘aha’ to gain sustainable competitive advantage — in other words, a significant, meaningful insight about how to win.” He also said, “If you don’t have a competitive advantage, don’t compete.”

Chapter 5: The Kernel of Good Strategy

The kernel of a strategy contains three elements:

• A diagnosis that defines or explains the nature of the challenge. A good diagnosis simplifies the often-overwhelming complexity of reality by identifying certain aspects of the situation as critical.
• A guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis.
• A set of coherent actions that are designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the guiding policy.

In business, the challenge is usually dealing with change and competition.

• The first step toward effective strategy is diagnosing the specific structure of the challenge rather than simply naming performance goals.
• The second step is choosing an overall guiding policy for dealing with the situation that builds on or creates some type of leverage or advantage.
• The third step is the design of a configuration of actions and resource allocations that implement the chosen guiding policy.

In many large organizations, the challenge is often diagnosed as internal. That is, the organization’s competitive problems may be much lighter than the obstacles imposed by its own outdated routines, bureaucracy, pools of entrenched interests, lack of cooperation across units, and plain – old bad management. Thus, the guiding policy lies in the realm of reorganization and renewal. And the set of coherent actions are changes in people, power, and procedures. In other cases, the challenge may be building or deepening competitive advantage by pushing the frontiers of organizational capability.

Diagnosis: ‘What’s going on here?’: A great deal of strategic work is trying to figure out what is going on. Not just deciding what to do, but the more fundamental problem of comprehending the situation.

• At a minimum, a diagnosis names or classifies the situation, linking facts into patterns and suggesting that more attention be paid to some issues and less to others.
• When a diagnosis classifies the situation as a certain type, it opens access to knowledge about how analogous situations were handled in the past. An explicit diagnosis permits one to evaluate the rest of the strategy.
• In business, most deep strategic changes are brought about by a change in diagnosis – a change in the definition of the company’s situation.

Guiding Policy: Like the guardrails on a highway, the guiding policy directs and constrains action without fully defining its content.

• A good strategy is not just “what” you are trying to do. It is also “why” and “how” you are doing it.
• A good guiding policy tackles the obstacles identified in the diagnosis by creating or drawing upon sources of advantage.
• 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.
• But, absent a good guiding policy, there is no principle of action to follow.

Action: “Without action, the world would still be an idea.”

• The actions within the kernel of strategy should be coherent. That is, the resource deployments, policies, and maneuvers that are undertaken should be consistent and coordinated. The coordination of action provides the most basic source of leverage or advantage available in strategy.
• On the other hand, the potential gains to coordination do not mean that more centrally directed coordination is always a good thing.

Part II: Sources of Power

A good strategy works by harnessing power and applying it where it will have the greatest effect.

In the short term, this may mean attacking a problem or rival with adroit combinations of policy, actions, and resources.

In the longer term, it may involve cleverly using policies and resource commitments to develop capabilities that will be of value in future contests.

Chapter 6: Using Leverage

A good strategy draws power from focusing minds, energy, and action. That focus, channeled at the right moment onto a pivotal objective, can produce a cascade of favorable outcomes. I call this source of power leverage.

In general, strategic leverage arises from a mixture of anticipation (e.g. behavior of others, especially rivals).

To achieve leverage, the strategist must have insight into a pivot point that will magnify the effects of focused energy and resources.

A pivoting point magnifies the effect of effort. It is a natural or created imbalance in a situation, a place where a relatively small adjustment can unleash much larger pent-up forces.

Returns to concentration arise when focusing efforts on fewer, or more limited, objectives generates larger payoffs. These gains flow from combinations of constraints and threshold effects.

“Threshold effect” exists when there is a critical level of effort necessary to affect the system. Levels of effort below this threshold have little payoff. When there are threshold effects, it is prudent to limit objectives to those that can be affected by the resources at the strategist’s disposal. For example, there seems to be a threshold effect in advertising. That is, a very small amount of advertising will produce no result at all. One has to get over this hump, or threshold, to start getting a response to advertising efforts.

Chapter 7: Proximate Objectives

One of a leader’s most powerful tools is the creation of a good proximate objective — one that is close enough at hand to be feasible. A proximate objective name a target that the organization can reasonably be expected to hit, even overwhelm.

• An important duty of any leader is to simplify the complexity and ambiguity of the situation – one that is solvable (e.g. war on drugs = hard to achieve/not feasible)
• Many leaders fail badly at this responsibility, announcing ambitious goals without resolving a good chunk of ambiguity about the specific obstacles to be overcome.
• 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.

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. For the most part, the aim of a move is to find positions for one’s pieces that

• a) increase their mobility, that is , increase the options open to them and decrease the freedom of operation of the opponent’s pieces and
• b) impose certain relatively stable patterns on the board that induce enduring strength for oneself and enduring weakness for the opponent.

What one single feasible objective, when accomplished, would make the biggest difference?

Chapter 8: Chain-Link Systems

• A system has chain-link logic when its performance is limited by its weakest link.
• In a business context, this typically means each department is dependent on the other such that if one department underperforms, the performance of the entire system will decline.
• Quality matching – if you are in charge of one link of the chain, there is no point in investing resources in making your link better if other link managers are not. The whole chain must be strengthened.
• I learned that in assessing a property’s potential, one should identify the limiting factors. If a house is near a noisy highway, that is a limiting factor. No matter how much marble is put in the bathrooms or how fine the cabinetry is in the kitchen, the noise will limit the house’s value.
• If you have a special skill or insight at removing limiting factors, then you can be very successful (e.g. we don’t have enough leads, our profit margins aren’t meeting targets, etc.).

Chapter 9: Using Design

A good strategy is design, and design is about fitting various pieces together, so they work as a coherent whole.

These principles mean that resources and tight coordination are partial substitutes for each other. If the organization has few resources, the challenge can be met only by clever, tight integration. On the other hand, if more resources are available, then less tight integration may be needed. Put differently, the greater the challenge, the greater the need for a good, coherent, design-type strategy.

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 high – quality strategic resource yielding a powerful competitive advantage makes for great strategic simplicity.

Success leads to laxity and bloat, and these lead to decline. Few organizations avoid this tragic arc.

Chapter 10: Focus

“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.

At the core, strategy is about focus, and most complex organizations don’t focus their resources. Instead, they pursue multiple goals at once, not concentrating enough resources to achieve a breakthrough in any of them.

Chapter 11: Growth

Growing the size of the business is not a strategy – it is the result of increased demand for your products and services. 

Chapter 12: Using Advantage

In real rivalry, it is the leader’s job to identify which asymmetries (differences) can be turned into important advantages.

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 on your own.

The basic definition of competitive advantage is straightforward. If your business can produce at a lower cost than can competitors, or if it can deliver more perceived value than can competitors, or a mix of the two, then you have a competitive advantage.

Defining “sustainability” is trickier. For an advantage to be sustained, your competitors must not be able to duplicate it. Or, more precisely, they must not be able to duplicate the resources underlying it.

For that you must possess what I term an “isolating mechanism,” such as a patent giving its holder the legally enforceable right to monopolize the use of a technology for a time. 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.

Increasing value requires a strategy for progress on at least one of four different fronts:

• Deepening advantages – widening this gap by either increasing value to buyers, reducing costs, or both.
• Broadening the extent of advantages – 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.”
• Creating higher demand for advantaged products or services – when the number of buyers grows and /or when the quantity demanded by each buyer increases.
• Strengthening the isolating mechanisms that block easy replication and imitation by competitors.

Chapter 13: Using Dynamics

Create new opportunities and competitive advantages through pure innovation or exploit a wave of change.

• Waves of change are largely exogenous — they are mostly beyond the control of any one organization.

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 (e.g. GLP drugs > weight loss > decrease cravings > impacts snack foods)

To aid my own vision into the fog of change I use a number of mental guideposts. Each guidepost is an observation or way of thinking that seems to warrant attention.

First – transition induced by escalating fixed costs. This increase may force the industry to consolidate because only the largest competitors can cover these fixed charges

Second – transition created by deregulation – major changes in government policy.

Third highlights predictable biases in forecasting:

• People rarely predict that a business or economic trend will peak and then decline; the faster the uptake of a durable product, the sooner the market will be saturated;
• Standard forecast will be for a “battle of the titans.” This prediction, that the market leaders will duke it out for supremacy, undercutting the middle – sized and smaller firms, is sometimes correct but tends to be applied to almost all situations.
• Future winners will be, or will look like, the current apparent winners.

Fourth marks the need to properly assess incumbent response to change (expect incumbent firms to resist a transition that threatens to undermine the complex skills and valuable positions they have accumulated over time).

Fifth guidepost is the concept of an attractor state (describes how the industry “should” work in the light of technological forces and the structure of demand).

• An attractive state provides a sense of direction for the future evolution of an industry.

Chapter 14: Inertia and Entropy

In business, inertia is an organization’s unwillingness or inability to adapt to changing circumstances.

Even with change programs running at full throttle, it can take many years to alter a large company’s basic functioning. Similarly, weakly managed organizations tend to become less organized and focused.

Successful strategies often owe a great deal to the inertia and inefficiency of rivals.

• Netflix pushed past the now – bankrupt Blockbuster because the latter could not, or would not, abandon its focus on retail stores.

Understanding the inertia of rivals may be just as vital as understanding your own strengths.

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. Leaders must diagnose the causes and effects of entropy and inertia, create a sensible guiding policy for effecting change, and design a set of coherent actions designed to alter routines, culture, and the structure of power and influence.

Organizational inertia generally falls into one of three categories: inertia of routine, cultural inertia, and inertia by proxy.

Routines: Inertia due to obsolete or inappropriate routines can be fixed. If senior leaders become convinced that new routines are essential, change can be quick.

Culture Inertia: 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.
• 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.
• 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.

Proxy: A business may choose to not respond to change or attack because responding would undermine still – valuable streams of profit. Inertia by proxy disappears when the organization decides that adapting to changed circumstances is more important than hanging onto old profit streams.

Part III: Thinking Like a Strategist

In creating strategy, it is often important to take on the viewpoints of others, seeing how the situation looks to a rival or to a customer. Advice to do this is both often given and taken. Yet this advice skips over what is possibly the most useful shift in viewpoint: thinking about your own thinking.

Chapter 16: The Science of Strategy

A good strategy is, in the end, a hypothesis about what will work. Not a wild theory, but an educated judgment.

The ultimate worth of a strategy is determined by its success

This process of learning — hypothesis, data, anomaly, new hypothesis, data, and so on — is called scientific induction and is a critical element of every successful business.

Chapter 17: Using Your Head

Being strategic is being less myopic — less shortsighted — than others. You must perceive and take into account what others 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. Whether it is insight into industry structures and trends, anticipating the actions and reactions of competitors, insight into your own competencies and resources, or stretching your own thinking to cover more of the bases and resist your own biases, being “strategic” largely means being less myopic than your undeliberative self.

Most people, most of the time, solve problems by grabbing the first solution that pops into their heads — the first insight. Our instincts can often produce amazingly good judgments. But our instincts also tell us, incorrectly, that our instincts are always right.

• You should recognize which situations require deeper reflection. Are competitors or nature leading us into a trap? Can we set a trap for less-wary adversaries?

To guide your own thinking in strategic 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.

• Problem – Solution Many attempts at strategy lack a good diagnosis. Hence, it is useful to have mental tools for working backward from a guiding policy to the realm of diagnosis and fact.
• 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.

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.

• Trying to destroy your own ideas is not easy or pleasant. It takes mental toughness to pick apart one’s own insights.
• When I face a problem, or have generated a first hunch, I turn to this panel and ask, “What is wrong with this approach to the situation? What would you do in this case?”

Third, you must cultivate the habit of making and recording judgments so that you can improve.

• To commit to a judgment is to choose an interpretation of which issues are critical and which are not and then to choose an implied action.
• By committing to a judgment — especially a diagnosis — you increase the probability that you will disagree with some of the assessments of others, and thereby increase the chance of learning something.
• The same principle applies to any meeting you attend. What issues do you expect to arise in the meeting? Who will take which position? Privately commit yourself in advance to some judgments about these issues, and you will have daily opportunities to learn, improve, and recalibrate your judgment.