Anticipation

the key anticipations are often of buyer demand and competitive reactions.

The strategy must have insight into predictable aspects of others' behavior that can be turned to advantage.  At the simplest level, a strategy of investing in Manhattan real estate is based on the anticipation that other people's future demand for this real estate will raise its value.  In competitive strategy, the key anticipations are often of buyer demand and competitive reactions.

As an example of anticipation, while the SUV craze was booming in the United States, Toyota invested more than $1 billion in developing hybrid gasoline-electric technologies: an electronically controlled continuously-variable-speed transmission and its own chips and software to control the system.  There were two anticipations guiding this investment.  First, management believed that fuel economy pressures would, over time, make hybrid vehicles a major product category.  Second, management believed that, once presented with the chance to license Toyota's technology, other automakers would do so and not invest in developing possibly superior systems.  Thus far, both anticipations have proven reasonably accurate.

ACTION POINT: What are the predictable behaviors of your markets that you can anticipate to create advantage?

Leverage II

strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation

Knock loose a keystone, and a giant will fall. Seize the moment, as James Madison did in 1787, turning colleague Edmund Randolph's ideas about three branches of government with a bicameral legislature into the first draft of the Constitution, and you just might found a great nation.

When the largest computer company in the world comes knocking at your door in 1980 asking if you can provide an operating system for a new personal computer, say, "Yes, we can!"  And be sure to insist, as Bill Gates did in 1980, that, after they pay you for the software, the contract still permits you to sell it to third parties.  You just might become the richest person in the world.

ACTION POINT: In general, strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and making a concentrated application of effort.

Leverage

Finding such crucial pivot points and concentrating force on them is the secret of strategic 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.  This source of power can be called leverage.

Archimedes, one of the smartest people who ever lived, said, "Give me a lever long enough, a fulcrum strong enough, and I'll move the world."  What he no doubt knew, but did not say, was that to move the earth, his lever would have to be billions of miles long.  With this enormous lever, a swing of Archimedes' arm might move the earth by the diameter of one atom.  Given the amount of trouble involved, he would be wise to apply his lever to a spot where this tiny movement would make a large difference.  Finding such crucial pivot points and concentrating force on them is the secret of strategic leverage.

ACTION POINT: Look for the place where small changes will make big differences.

Things I am Thankful for

Grace

Wife

Sons
Daughters
Friends

Work
This time of year.

Happy Thanksgiving

Sources of Power

There is more to know about strategy than any one volume can possible treat.

The next posts will explore a number of fundamental sources of power used in good strategies:  leverage, proximate objectives, chain-link systems, design, focus, growth, advantage, dynamics, inertia, and entropy.

Obviously, this set is not exhaustive.  There is more to know about strategy than any one volume can possible treat.  The sources of power (and trouble) featured were chosen for both their generality and freshness.  Most extend beyond a business context and apply to government, security, and nonprofit situations as well.  Plus, they explore particular issues that are fundamental but that have not been given as much attention as they deserve.

ACTION POINT: Stay tuned for more on sources of power.

Sources of Power

a "good strategy" is an approach that magnifies the effectiveness of actions by finding and using sources of power

In very general terms, 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.  In either case, a "good strategy" is an approach that magnifies the effectiveness of actions by finding and using sources of power.

ACTION POINT: Find, use and magnify your sources of power.

Coordination V

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 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 the 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.

ACTION POINT: Seek specialization in the right activities and impose coordination only when essential and for the benefit of the entire organization.

Coordination IV

Coordination is costly, because it fights against the gains to specialization,

On the other hand, the potential gains to coordination do not mean that more centrally directed coordination is always a good thing.  Coordination is costly, because it fights against the gains to specialization, the most basic economies in organized activity.  

To specialize in something is, roughly speaking, to be left alone to do just that thing and not be bothered with other tasks, interruptions, and other agents' agendas.  As is clear to anyone who has belonged to a coordinating committee, coordination interrupts and de-specializes people.

ACTION POINT: Understand the need and time for specialization.

Coordination III

It takes policies devised to benefit the whole to sort out this conflict.

As a simple example, Salespeople love to please customers with rush orders, and manufacturing people prefer long uninterrupted  production runs.  But you cannot have long production runs and handle unexpected rush orders all at the same time.  It takes policies devised to benefit the whole to sort out this conflict.

On a larger canvas, in World War II, President Franklin D. Roosevelt coordinated political, economic, and military power to defeat Nazi Germany, using United States' productive capacity to support the Soviet Union, thus allowing it to survive and degrade the Nazi war machine before Americans landed in Normandy.  Another element of strategy, one with great consequences, was to focus the bulk of American resources to first winning in Europe before fully taking on Japan, a complex coordination of forces over time.  Neither of these crucial policies would have emerged out of decentralized decision making among the Departments of State and War, the various war production boards, and multiple military commands.

ACTION POINT: Coordinate polices devised to benefit the whole of the organization.

Coordination II

It is an exercise in centralized power, used to overcome the natural workings of a system.  

Strategy is visible as coordinated action imposed on a system.  When we say strategy is "imposed", we 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?  One of the great lessons of the twentieth century--the most dramatic controlled experiment in human history--was that centrally controlled economies are grossly inefficient.   More people starved to death in Stalin's and Mao Tse-tung's centrally planned regimes than were killed in World War II.

In modern economies, trillions of decentralized choices are made each year, and this process can do a pretty good job of allocating certain kinds of scarce resource.  Thus, when the price of gasoline rises, people start buying more fuel-efficient cars without any central planning.  After a hurricane, when there is much to rebuild, wages rise, attracting more workers to the stricken area. 

But decentralized decision making cannot do everything.  In particular, it may fail when either the costs or benefits of actions are not borne by the decentralized actors.  The split between the costs and benefits may occur across organizational units or between the present and the future.  And decentralized coordination is difficult when benefits accrue only if decisions are properly coordinated. 

ACTION POINT: Understand when it makes sense to impose centralized strategy and when to allow decentralized autonomy.

Coordination

Strategic coordination, or coherence, is not ad hoc mutual adjustment.

A strategy coordinates action to address a specific challenge.  The idea that coordination, by itself, can be a source of advantage is a very deep principle.  It is often under appreciated because people 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 coherence imposed on a system by policy and design.  More specifically, design is the engineering of fit among parts, specifying how actions and resources will be combined.

ACTION POINT: Coordinate your actions to accomplish your strategy.

Conflict

Strategic actions that are not coherent are either in conflict with one another or taken in pursuit of unrelated challenges.

Strategic actions that are not coherent are either in conflict with one another or taken in pursuit of unrelated challenges.  Consider Ford Motor Company.  When Jacques Nasser was the CEO of Ford Europe and vice president of Ford product development, he said, "Brand is the key to profits in the automobile industry."  

Moving into the corporate CEO spot in 1999, Nasser quickly acted to acquire Volvo, Jaguar, Land Rover, and Aston Martin. However, at the same time, the company's original guiding policy of "economies of scale" was fully alive and kicking.  A senior Ford executive said in 2000: "You cannot be competitive in the automobile industry unless you produce at least one million units per year on a platform."  Thus, the actions of buying Volvo and Jaguar were conjoined with actions designed to put both brands on a common platform.  Putting Jaguar and Volvo on the same platform dilutes the band equity of both marques and annoys the most passionate customers, dealers, and service shops.  Volvo buyers don't want a "safe Jaguar"; they want a car that is uniquely safe.  And Jaguar buyers want something more distinctive than a "sporty Volvo."  These two sets of concepts and actions were in conflict rather than being coherent.

ACTION POINT: Look for potential conflicts that actions may cause and avoid them.

Coherence

Using such a cost advantage to good effect will require the alignment of many actions and policies.

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 of advantage available in strategy.

In a fight, the simplest strategy is a feint to the left and then punch from the right, a coordination of movement in time and space.  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.  

Even when an organization has an apparently simple and basic source of advantage, such as being a low-cost producer, a close examination will always reveal a raft of interrelated mutually supporting policies that, in this case, keep costs low. Furthermore, it will be found that these costs are lower only for a certain type of products delivered under certain conditions.  Using such a cost advantage to good effect will require the alignment of many actions and policies.

ACTION  POINT: Ensure your actions are aligned with your policies.

Coherent Action III

...strategy is primarily about deciding what is truly important and focusing resources and action on that objective

The kernel of strategy -- a diagnosis, a guiding policy, and coherent action -- applies to any complex setting.  In many situations the required actions are not mysterious.  The impediment is often the hope that the the pain that those actions may cause could be avoided.  Indeed, we always hope that a brilliant insight or very clever design will allow us to accomplish several apparently conflicting objectives with a single stroke, and occasionally we are vouchsafed this kind of deliverance.

Nevertheless, strategy is primarily about deciding what is truly important and focusing resources and action on that objective.

ACTION POINT: Strategy is a hard discipline because focusing on one thing slights another.

Coherent Action II

"Without action, the world would still be an idea."

INSEAD, a global business school located in France, was the brainchild of Harvard professor General Georges F. Doriot. The INSEAD library holds a bronze statue of Doriot inscribed with his observation "Without action, the world would still be an idea."

In many situations, the main impediment to action is the forlorn hope that certain painful choices or actions can be avoided--that the whole long list of hoped-for "priorities" can all be achieved.  It is the hard craft of strategy to decide which priority shall take precedence.  Only then can action be taken.  And, interestingly, there is no greater tool for sharpening strategic ideas than the necessity to act.

ACTION POINT: Determine and decide on priorities, then act.

Coherent Action

Strategy is about action, about doing something.

Many people call the guiding policy "the strategy" and stop there.  This is a mistake.  Strategy is about action, about doing something.  The kernel of a strategy must contain action.  It does not need to point to all the actions that will be taken as events unfold, but there must be enough clarity about action to bring concepts down to earth. To have punch, actions should coordinate and build upon one another, focusing organizational energy.

ACTION POINT: Have a bias toward action.

The Guiding Policy V

...the policy itself also created advantage by resolving the uncertainty about what to do, about how to compete, and about how to organize.

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.

For example, Gerstner's "provide customer solutions" policy certainly counted on the advantages implicit in IBM's world class technological depth and expertise in almost all areas of data processing.  But the policy itself also created advantage by resolving the uncertainty about what to do, about how to compete, and about how to organize.  It also began the process of coordinating and concentrating IBM's vast resources on a specific set of challenges.

ACTION POINT: Reduce complexity and ambiguity and use anticipation to create advantage. 

The Guiding Policy IV

the heart of the matter in strategy is usually advantage. 

A good guiding policy tackles the obstacles identified in the diagnosis by creating or drawing upon sources of advantage.  Indeed, the heart of the matter in strategy is usually advantage.  Just as a lever uses mechanical advantage to multiply force, strategic advantage multiplies the effectiveness of resources and/or actions.  Importantly, not all advantage is competitive.  In nonprofit and public policy situations, good strategy creates advantage by magnifying the effects of resources and actions.

In most modern treatments of competitive strategy, it is now common to launch immediately into detailed descriptions of specific sources of competitive advantage.  Having lower costs, a better brand, a faster product-development cycle, more experience, more information about customers, and so on, can all be sources of advantage.  This is all true, but it is important to take a broader perspective.  A good guiding policy itself can be a source of advantage.

ACTION POINT: Take a broad perspective and understand your advantage when developing strategy.

The Guiding Policy III

 Good strategy is not just "what" you are trying to do. 

Many people use the term "strategy" for what we are calling the "guiding policy."  Defining a strategy as just a broad guiding policy is a mistake.  Without a diagnosis, one cannot evaluate alternative guiding policies.

Without working through to at least the first round of action one cannot be sure that 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.

ACTION POINT: Understand the "why" and "how" of what you are trying to accomplish.

The Guiding Policy II

they define a method  of grappling with the situation and ruling out a vast array of possible actions.

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.  For example, Well Fargo's corporate vision is this: "We want to satisfy all of our customers' financial needs, help them succeed financially, be the premier provider of financial services in every one of our markets, and be known as one of America's great companies."

This "vision" communicates an ambition, but it is not a strategy or a guiding policy because there is no information about how this ambition will be accomplished.  Wells Fargo chairman emeritus and former CEO Richard Kovacevich knew this an distinguished between this vision and his company's guiding policy of using network effects of cross-selling.  That is, Kovacevich believed that the more different financial products Wells Fargo could sell to a customer, the more the company would know about that customer and about its whole network of customers.  That information would, in turn, help it create and sell financial products.  This guiding policy, in contrast to Wells Fargo's vision, calls out a way of competing--a way of trying to use the company's large scale to advantage.

ACTION POINT: Understand the distinction between guiding policy and vision.