Exhaustive Analysis of Good Strategy / Bad Strategy
The Core Meaning and Fundamental Structure of Strategy
Strategy is fundamentally about identifying the one or two critical issues in a situation and designing a way of coordinating and focusing actions to deal with them. A good strategy is simple and obvious in hindsight, but it does not emerge from standardized management tools or fill-in-the-blanks schemes. Instead, it involves discovering the pivot points that multiply the effectiveness of effort. A classic historical example is Admiral Lord Nelson at the Battle of Trafalgar in . Facing a combined Franco-Spanish fleet of ships with only British vessels, Nelson broke traditional naval tactics. Instead of firing broadsides in parallel lines, he split his fleet into two columns to strike the enemy perpendicularly. This broke the coherence of the enemy fleet and allowed more experienced British captains to win a melee, resulting in the loss of enemy ships and zero British ships. Strategy is the application of strength against weakness or to the most promising opportunities.
At its heart, strategy work is the design of a cohesive response to a high-stakes challenge. It is not ambition, leadership, or vision alone, although those elements are important. Ambition is the zeal to excel; determination is commitment; innovation is engineering new ways to do things; and inspirational leadership motivates sacrifice. Strategy, however, selects the path and determines how and where those other virtues are applied. A strategy that fails to define Plausible and feasible immediate actions is missing its most critical logic. This is the common failure of executives who confuse strategy with goal setting. If an organization's process is merely setting targets—such as market share or profit goals—without a problem-solving approach, it is performing goal setting, not strategy.
The Kernel of Good Strategy
A good strategy has an essential logical structure called the kernel, which consists of three elements: a diagnosis, a guiding policy, and coherent actions. The diagnosis defines or explains the nature of the challenge, simplifying reality by identifying critical aspects of the situation. An insightful diagnosis can transform the view of a situation, such as Lou Gerstner’s shift at IBM from viewing the company as too integrated to seeing its integration as its unique consulting advantage. The guiding policy is an overall approach chosen to cope with the obstacles identified in the diagnosis. It provides direction without defining the exact trip, like a guardrail on a highway. Coherent actions are coordinated policies, resource commitments, and steps designed to carry out the guiding policy. In strategy, these actions are not details; they are the leverage that makes the concept effective. Coherence provides strength by ensuring actions build upon one another rather than canceling each other out.
Hallmarks and Hallucinogens of Bad Strategy
Bad strategy is not simply the absence of good strategy; it has its own logic and foundations. It is often created to avoid the pain of making difficult choices. The four major hallmarks of bad strategy include fluff, the failure to face the challenge, mistaking goals for strategy, and bad strategic objectives. Fluff is jargon masquerading as strategic thought; for instance, a bank defining its strategy as "customer-centric intermediation" is merely saying it is a bank. Failure to face the challenge occurs when the strategy does not define the problem, as seen with International Harvester's plan that ignored its inefficient work organization and poor labor relations, leading to losses over between and . Mistaking goals for strategy involves treating desire as a plan, such as Chad Logan’s plan (growth of and margin of ) which lacked any action beyond motivation.
Bad strategic objectives are often a "dog’s dinner" of unrelated tasks or are unreachable "blue-sky" goals. An example of blue-sky objectives is seen in the Los Angeles Unified School District's () plan, which called for "transformational leadership" without diagnosing why previous efforts failed or how to bypass entrenched bureaucracies. In , of schools failed targets, and dropout rates reached for black students and for Hispanic students. Strategic objectives should be proximate—close enough to be feasible and within the organization's current grasp.
Sources of Strategic Power: Leverage and Design
One natural advantage of good strategy is its unexpectedness, arising because most organizations do not focus their resources. In , Steve Jobs saved Apple not by seeking market share but by shrinking the company to a scale it could survive. He cut desktop models to , cut all portable models to laptop, and reduced inventory by more than . Strategy also creates power through leverage, which involves a mixture of anticipation, pivot points, and concentration. Pierre Wack at Shell anticipated the oil crisis of by analyzing the needs of oil-producing countries. Leverage is applied at a pivot point to multiply the effect of effort, such as Harold Williams at the Getty Trust deciding to use an annual budget of over to transform the study and conservation of art rather than just buying expensive paintings.
Design is another source of power, emphasizing that strategy is constructed rather than just chosen. As seen with Hannibal at the Battle of Cannae in , he designed a trap where his center line executed a mock retreat, drawing the Roman army of into a pocket where they were surrounded by Carthaginians. Tight integration of resources is necessary when the challenge is high. If resources are high-quality, the need for tight integration decreases. This trade-off is central to design-type strategy. Paccar, for example, maintains a consistent market share of in a cyclical industry by focusing on high-quality trucks for owner-operators, yielding an of compared to the industry average of .
Overcoming Inertia and Entropy
Inertia is an organization's resistance to change, while entropy is the natural decay of order. Organizational inertia includes the inertia of routine, cultural inertia, and inertia by proxy. Continental Airlines displayed the inertia of routine during deregulation by continuing to use cost-plus pricing models that ignores competition. Cultural inertia is exemplified by , where a research-heavy culture prevented effective product development. Ending entropy requires constant management, as seen at Denton's Inc., where a hump chart analysis of its locations revealed that half were losing money, canceling out the profits of the best stores. General Motors underwent a slow decay of Alfred Sloan’s original product policy, leading to a blurred brand identity where multiple cars competed at the same price point, eventually leading to its bankruptcy.
Thinking Like a Strategist
Strategies should be viewed as scientific hypotheses—educated guesses about what will work, which are then tested through action. Howard Schultz at Starbucks observed the Milanese espresso bars as an anomaly in the American context. He tested his hypothesis through Il Giornale, eventually refining the model by adding chairs and nonfat milk to suit American tastes. This process of learning from anomalies and capturing proprietary information is the science of strategy. Strategists must also fight their own cognitive biases, such as "the inside view," which leads people to believe "this time is different." During the financial crisis, the inside view blinded leaders to the historical precedent of credit-fueled real estate booms. Household debt rose from of income in to in , while firms like Bear Stearns operated with leverage as high as . Successful strategy requires keeping ones head, using independent judgment, and applying analytical tools like "create-destroy" and panels of experts to challenge one's own assumptions.