Order out of Chaos II

Its not easy to hold this kind of quality leadership for three big reasons. 

Fleet operators look at differences of a fraction of a cent per mile in making purchasing decisions, and the swing in costs is mostly fuel and wages.  Because of this Kenworth pioneered low-drag aerodynamic truck cabs thirty hers ago as a way to cut fuel costs.

Its not easy to hold this kind of quality leadership for three big reasons.  First, no one will believe you have the longest lasting trucks until they have already lasted a long time on the road.  It's a reputation that takes a while to earn and can be lost quickly.  Second, designing a very high-quality piece of machinery is not a textbook problem.  Designers learn from other designers over time, and the company accumulates these nuggets of wisdom by providing a good, stable place to work for talented engineers.  Third, it is usually quite difficult to convince buyers to pay an up-front premium for future savings, even if the numbers are clear.   People tend to be more myopic than economic theory would suggest.

ACTION POINT: Design for the obstacles that confront you.

Order out of Chaos

The company prices accordingly, maintaining its strong market position despite premium prices.

One example of good strategy in which you can see the coordinated elements of design in the U.S. heavy-truck business.  Daimler AG is the market-share leader (38 percent).  It got that large by buying Ford's troubled heave-truck business in 1977.  The next largest produces is Paccar (25 percent), followed by Volvo (20 percent), and then Navistar (16 percent).  Plumb in the middle of a low-growth, mature, very competitive industry, Paccar nevertheless turns in a solid performance.  Even more important Paccar's profits have been remarkably stable in an industry plagued by strong upswings and downswings in demand.  Paccar has not lost money since 1939, and its profit roll continues despite the recession of 2008-09.  Its returns on equity over the past twenty years has averaged 16 percent, compared with an average return of 12 percent earned by its competitors. 

The driving element in Paccar's strategy is quality, with its Kenworth and Peterbilt brands widely recognized as the highest-quality trucks made in North America.  Paccar has received J.D. Power awards for its heavy trucks and for its service.   The company prices accordingly, maintaining its strong market position despite premium prices.

ACTION POINT: How can you sell a truck at a premium price? In theory it is simple--your trucks have to run better and last longer so that the owner's cost to operate the truck is lower.

The Arc of the Enterprise V

Success leads to laxity and bloat, and these lead to decline. 

A very powerful resource position produces profit without great effort, and it is human nature that the easy life breeds laxity.  It is also human nature to associate current profit with recent actions, even though it should be evident that current plenty is the harvest of planting seasons long past.  When the profits roll in leaders will point to their every action with pride.

Books will be written recommending that others immediately adopt the successful firm's dress code, its vacation policy, its suggestion-box policies, and its method of allocating parking spaces.  Of course, these connections are specious.  Were there simple, direct connections between current actions and current results, strategy would be a lot easier.  It would also be a lot less interesting, for it is the disconnect between current results and current action that makes the analysis of the sources of success so hard and ultimately, so rewarding.

Success leads to laxity and bloat, and these lead to decline.  Few organizations avoid this tragic arc.  Yet is is the fairly predictable trajectory that opens the door to strategic upstarts.  

ACTION POINT:  To see effective design-type strategy, you must usually look away from the long-successful incumbent toward the company that effectively invades its market space.  There you will find a tightly crafted and integrated set of actions and policies.

The Spirit of an Organization

"It’s the abilities, not the disabilities that count.”

Two sayings sum up the “spirit of an organization.”  One is the inscription on Andrew Carnegie’s tombstone:

                        Here lies a man

                        Who knew how to enlist?

                        In his service

                        Better men than himself

The other is the slogan of the drive to find jobs for the physically handicapped: “It’s the abilities , not the disabilities, that count.”  

A good example was President Franklin D. Roosevelt’s confidential adviser in World War II, Harry Hopkins.  A dying, almost a dead man for whom every step was torment, he could work only a few hours every other day or so.  This forced him to cut out everything but truly vital matters.  He did not lose effectiveness thereby; on the contrary, he became as Churchill called him once, “Lord Heart of the Matter” and accomplished more than anyone else in wartime Washington.  Roosevelt broke every rule in the book to enable the dying Harry Hopkins to make his unique contribution.

ACTION POINT: Figure out what each of your employees’ or colleagues’ strengths are and develop these strengths to help people perform better. 

The Arc of the Enterprise IV

Existing resource can be the lever for the creation of new resources, but they can also be an impediment to innovation.

The peril of a potent resource position is that success then arrives without careful ongoing strategy work.  Own the original patent on the plain-paper photocopier, or own the Hershey's brand name, or the Windows operating system franchise, or the patent on Lipitor, and there will be many years during which profits will roll in almost regardless of how you arrange your business logic.  Yes, there was inventive genius in the creation of these strategic  resources, but profits from those resources can be sustained, for a time, without genius.  

Existing resource can be the lever for the creation of new resources, but they can also be an impediment to innovation.  Well led firms must, from time to time, cast aside old resources, just as they retire obsolete machinery. Yet strategic resources are embedded deeply within the human fabric of the enterprise, and most firms find this a difficult maneuver.

ACTION POINT: Are their old resources or obsolete machinery, process or tools that are impeding innovation?

The Arc of the Enterprise III

... a strong resource position can obviate the need for sophisticated design type strategy.

Resources are to coordinated activity as capital is to labor.  It takes a great deal of labor to build a dam, but the dam's services may then be available for a time without further labor.  In the same way,  Xerox's powerful resource position--its' knowledge and patents regarding plain-paper copying-was the accumulated result of years of clever, focused, coordinated, inventive activity.

And like a dam, once that well protected resource position was achieved, it persisted for many years.  Thus, a strong resource position can obviate the need for sophisticated design type strategy.  If, instead, there is only a moderate resource position--perhaps a new product idea or a customer relationship--the challenge is to build a sensible and coherent strategy around that resource.  Finally, the cleverest strategies, the ones we study down through the years, begin with very few strategic resources, obtaining their results through the adroit coordination of actions in time and across functions.

ACTION POINT: What is the strength of your resource position?

The Arc of the Enterprise II

It did not need much in the way of a design-type strategy because its resource position--its patent--insulated it from competition and because the product's value to buyers was so much greater than the cost of making one. 

Consider Xerox's patents on plain paper copying.  By the mid-1950's these patents were rock solid, and it became clear that buyers would be willing to pat three thousand dollars or more for a Xerox machine--a device that cost about seven hundred dollars to manufacture.  Give this large and protected competitive advantage, Xerox did the obvious--it made and sold Xerox machines.

Xerox build factories, produced Xerox plain-paper photocopiers, and build sales and service networks.  It experienced no meaningful competition from any of the old-line wet-process copier companies.  It's challenge was low.  It did not need much in the way of a design-type strategy because its resource position--its patent--insulated it from competition and because the product's value to buyers was so much greater than the cost of making one.

ACTION POINT: What is the challenge level from your competition?  What is your value to your buyers?

The Arc of the Enterprise

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

Companies buy pickup trucks, office equipment, vertical milling machines, and chemical processing equipment, and they hire the services of warehouses, masses of high school and college graduates, lawyers, and accountants.  None of these inputs are normally strategic resources.  These kinds of assets and services cannot, in general, confer a competitive advantage, because competitors have access to virtually identical assets and services on the same terms.

A strategic resources 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. 

ACTION POINT:  Identify and build on resources that would be hard for competitors to duplicate.

The Managerial Attitude

The demands for a “managerial attitude” on the part of even the lowliest worker is an innovation.

No part of the productive resources of industry operates at a lower efficiency than the human resources.  The few enterprises that have been able to tap this unused reservoir of human ability and attitude have achieved spectacular increases in productivity and output.  In the better use of human resources lies the major opportunity for increasing productivity in the great majority of enterprises – so that the management of people should be the first and foremost concern of operating managements, rather than the management of things and techniques, on which attention has been focused so far.

We also know what makes for the efficiency and productivity of the human resources of production.  It is not primarily skill or pay; it is first and foremost, an attitude – the one we call the “managerial attitude.”  By this we mean an attitude that makes the individual see his job; his work, and his product the way a manager sees them, that is, in relation to the group and the product as a whole.

ACTION POINT: What actions can you take now to impart a sense of managerial responsibility into your workforce?

Integration, How Tight?

A more tightly integrated design is harder to create, narrower in focus, more fragile in use, and less flexible in responding to change. 

Implicit in these principles is the notion that tight integration comes at some cost.  That is, one does not always seek the very highest level of integration in a design for a machine or a business.  A more tightly integrated design is harder to create, narrower in focus, more fragile in use, and less flexible in responding to change. 

A Formula 1 racing car, for example, is a tightly integrated design and is faster around the track than Subaru Forester, but the less tightly integrated Forester is useful for a much wider range of purposes.  Nevertheless, when the competitive challenge is very high, it may be necessary to accept these costs and design in a tightly integrated response.  With less challenge, it is normally better to have a bit less specialization and integration so that a broader market can be addressed.

ACTION POINT: Balance integration cost with market appeal.

Resources and Actions

These principles mean that resources and tight coordination are partial substitutes for each other. 

A design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation.  Given a set bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions.  Given a set level of challenge, higher-quality resources lessen the need for the tight integration of resources and actions.

These principles mean that resources and tight coordination are partial substitutes for each other.  If the organization has few resources are available, then less tight integration may be needed.  

ACTION POINT:  The greater the challenge, the greater the need for a good, coherent, design-type strategy. 

The Trade Off

This trade off way of thinking about design is central to strategy.

The lesson from systems engineering at JPL was that performance is the joint outcome of capability and clever design.  In particular, given existing capabilities, such as rocket throw weight or power supply efficiency, to get more performance out of a system you have to integrate its components and subsystems more cleverly and more tightly.  

On the other hand, if capabilities (technologies) could be improved the demand for tight, clever integration was lessened.  That is, more powerful booster rockets or lighter components would let us meet the weight constraint with less work on tight integration.  This trade off way of thinking about design is central to strategy.

ACTION POINT:  Understand the balance between capabilities and clever design.

The Discipline of Design

This work required learning about all of the subsystems and their possible interactions in order to imagine a configuration that might be effective. 

Jet Propulsion Laboratories (JPL) was tasked with doing the conceptual designs of a mission to Jupiter, a project that would later be named Voyager.   JPL was organized around the subsystems of a spacecraft--communications, power, structures, attitude control, computing and sequencing, and so on.  In the systems division the job of a systems engineer was the overall architecture of the spacecraft and working out the coordination among the specifications of all the different subsystems.

The basic constraint was weight.  It was expected that the Titan IIIC rocket would launch about 1,200 pounds into a trajectory toward Jupiter.  Using a Saturn 1B would allow for a 3,000 pound spacecraft.  Two designs were sketched out over a year, each with a different configuration based on weight.   With 3,000 pounds to work with, the design work was relatively easy.   The designers could essentially bolt together fairly well-understood subsystems.  Consequently, the divisions would not have to coordinate very much because the design challenge was relatively low.  But if they only had 1,200 pounds to work with, things were more difficult.  Interactions began to play a big role.

Most of the work in systems design is figuring out the interactions, or trade-offs, as they were called.  The moment you tried to optimize any one part, that choice immediately posed problems for other parts.  The weight constraint made the whole thing a web of competing needs, and it all had to be considered together. Each part of the system had to be reconsidered and shaped to the needs of the rest of the system.  A great deal of work went into trying to create clever configurations that avoided wasteful duplication.  This work required learning about all of the subsystems and their possible interactions in order to imagine a configuration that might be effective.  It was difficult to say the least, but it is also the beginning of learning strategy.

ACTION POINT:  Understand the interactions involved when changing one part of a system.

Competitive Design

Competitive strategy is still design, but there are now more parameters--more interactions--to worry about. 

That difficult exercise was design.  But in seeking the best smile per dollar, we took a monopoly view.  Yes, we went beyond product to include manufacturing and distribution in the design, but our strategy was tuned to please the customer, not to deal with competition.  To deal with competition, expand your vision again to include other automobile companies.  Now you are looking for a competitive sweet spot.  You have to adjust the design--the strategy--to put more smile per dollar on a driver's face than she can get from competing products.  That driver might not be the young woman we first envisioned on the Angeles Crest Highway.  Another firm may more easily meet her demands, so a critical issue becomes the identification of the particular set of buyers--our target market--where we have a differential advantage.

Competitive strategy is still design, but there are now more parameters--more interactions--to worry about.  The new interactions are the offerings and strategies of rivals.  Very quickly, you are going to focus on what you, or your company, can do more effectively than others.  It will normally turn out that competition makes you focus on a much smaller subset of car models, manufacturing setups, and customers.

Describing strategy as a design rather than as a plan or as a choice emphasizes the issue of mutual adjustment.  In design problems, where various elements must be arranged, adjusted, and coordinated, there can be sharply peaked gains to getting combinations right and sharp costs to getting them wrong.  A good strategy coordinates policies across activities to focus the competitive punch.

ACTION POINT: A good strategy coordinates policies across activities to focus the competitive punch.

Performance and Cost

you can probably, with effort, produce a good configuration.

Form an image in your mind of the BMW's driver; see her taking the curves on the winding Angeles Crest Highway.  Look at her face and imagine sensing her pleasure or displeasure with the automobile.  Now, begin to vary the design.  Make the car bigger, quieter, a bit less responsive but more powerful, heavier.  Now, lighter, quicker, more responsive.  To do so, you have to change the chassis, the engine weight and torque, the suspension, the steering assembly, and more.  It will sway less and hug the road; the steering wheel will provide more tactile feedback.  Now adjust the chassis: make it stiffer to dampen longitudinal twists and soften the front suspension just a bit to reduce road shock.  Varying forty or fifty parameters, you will eventually find a sweet spot, where everything works together.  She will smile and like her car.

But there is more.  Her driving pleasure depends upon the price paid, so we begin to include cost in our design.  We concentrate on her smile per dollar.  Many more interactions must be considered to find the sweet spot that gives the largest smile per dollar.  You cannot search the entire space of possibilities; it is too complex.  But you can probably, with effort, produce a good configuration.  To get more sophisticated, you should also include the pleasure the driver takes in buying a premium brand, backed up by image advertising and swank dealers.  You should also consider her buying experience and the car's expected reliability and resale value.  More design elements to adjust, more interactions to consider.  And then, of course, you should consider other drivers with other tastes and incomes, a huge step upward in complexity and interaction.

ACTION POINT:  Expand your view of the interactions and complexity required for effective design.

The Parts Of A Whole

The chassis, steering, suspension, engine, and hydraulic and electrical controls have to be tuned to one another.  

Business and corporate strategy deal with large-scale design-type problems.  the greater the challenge, or the higher the performance sought, the more interactions have to be considered.  Think, for instance of what it takes to give a BMW 3 Series car that "driving machine" feel.  

The chassis, steering, suspension, engine, and hydraulic and electrical controls have to be tuned to one another.  You can make a car out of high-quality off-the-shelf parts, but it won't be a "driving machine."  In a case like this there is a sharp gain to careful coordination of the parts into a whole.

ACTION POINT: Consider the parts of your organization and how they interact.  Do your customers experience the "driving machine" feel?

Design of Coordinated Action II

he faced a challenge and he designed  a novel response.

It is often said that a strategy is a choice of a decision.  The words "choice' and "decision" evoke an image of someone considering a list of alternatives and then selecting one of them.  There is, in fact, a formal theory of decisions that specifies exactly how to make a choice by identifying alternative actions, valuing outcomes, and appraising probabilities of events.  The problem with this view, and the reason it barley lightens a leader's burden, is that you are rarely handed a clear set of alternatives.

In the case at hand, Hannibal was certainly not briefed by a staff presenting four options arranged on a PowerPoint slide.  Rather, he faced a challenge and he designed  a novel response.  Today, as then, many effective strategies are more designs than decisions--are more constructed than chosen.  In these cases, doing strategy is more like designing a high-performance aircraft than deciding which forklift truck to buy or how large to build a new factory.  

ACTION POINT: When someone says "Managers are decision makers," they are not talking about master strategists, for a master strategist is a designer.

Design of Coordinated Action

It was not expected that they would re-form and attack the main body of infantry. 

Hannibal's strategy at Cannae was an astoundingly adroit construction of coordinated actions orchestrated in time and in space.  In 216 B.C., the fundamental formula for military success was fairly basic:  keeping in formation, keeping discipline, and keeping troops from panicking and running. 

Therefore, when a Roman saw the enemy retreat, it looked like victory.  The idea that a commander could convince warlike Gauls and Spaniards into a mock retreat was almost unthinkable.  Furthermore, the normal pattern in ancient battle was that cavalry, after vanquishing the opposing cavalry, would chase fleeing disorganized horsemen and soldiers.  It was not expected that they would re-form and attack the main body of infantry.  The Carthaginian army's competence and discipline at carrying out a complex series of movements by different units --unit that were physically separated but acting in preplanned cohesion around a central design--was surprise.  No army before Hannibal's had executed such choreographed multiple movements in time and space.

ACTION POINT: What coordinated actions can be carried out to surprise the competition or the market?

Practice Comes First

Decision makers need to factor into their present decisions the “future that has already happened.”

Decision makers-in government, in the universities, in business, in the labor unions, in churches-need to factor into their present decisions the future that has already happened.  For this they need to know what events have already occurred that do not fit into their present-day assumptions, and thereby create new realities.

Intellectuals and scholars tend to believe that ideas come first, which then lead to new political, social, economic, psychological realities.  This does happen, but it is the exception.  As a rule theory does not precede practice.  Its role is to structure and codify already proven practice.  Its role is to convert the isolated and “atypical” from exception to “rule” and “system” and therefore into something that can be learned and taught and, above all, into something that can be generally applied.

ACTION POINT: Are the premises that you base your decisions on obsolete? Do you need a new intellectual frame work to win in the market, as it exists today?

Anticipation

In game theory one presumes that the opponent is as rational as oneself.  It is clear that Hannibal did not make that presumption. 

A fundamental ingredient in a strategy is a judgment or anticipation concerning the thoughts and/or behavior of others.  The simplest way of looking at Cannae is that Hannibal surrounded, or enveloped, the Romans.  But that is incomplete, for the Roman legions were the more mobile infantry on that field.  Actually, the legions were enticed into becoming enveloped, enticed into a trap, their own mobility, courage, and even initiative turned against them.   The very essence of Cannae was that the bars of the trap--the compression of the legions' ranks--were forged, in part, by the Romans' own vigorous responses to Hannibal's enticements. 

In game theory one presumes that the opponent is as rational as oneself.  It is clear that Hannibal did not make that presumption.  However, individually rational the Romans might have been, he saw the Roman army as an organization with a history, traditions, doctrine, and standardized training.  Furthermore, that organizations leaders had identifiable motivations and biases.  Some of the Roman leaders were known to be proud and a bit impetuous.

Hannibal knew these things because Carthage had fought Rome ten years earlier and came to understand its military system.  Also, part of the Roman behavior at Cannae was predictable because Hannibal had worked to shape it, raiding Varro's camp the night before, angering and embarrassing the consul in front of his troops, pushing him to seek immediate battle.  Finally, elements of Roman behavior were predictable because the battle developed quickly, giving the Romans little time to study the situation and no time to learn new lessons and alter their methods.

ACTION POINT: Don't presume, anticipate and study and know your competition.

Premeditation

By definition, winging it is not strategy.

Cannae was not an improvisation; it was designed and planned in advance.  Hannibal executed such choreographed strategies not just once, but many times in his years of war with Rome.

There are furious debates over the best balance, in a strategy, between prior guidance and on-the-spot adaptation and improvisation, but there is always some form of prior guidance.  By definition, winging it is not strategy.

ACTION POINT: Make the most of prior guidance and balance planning with adaptation and improvisation.