On Strategic Thinking

I can't recall how many times I have heard the word “strategy” since I graduated from college. It is a common business language at the top, middle and bottom.

I have some sense on what it means from my professional experiences and reading several books.

If an organization does it right, it can be critical for business growth and execution. But on the flip side no amount of strategy can help if management is deaf to feedback from its environment.

Strategic thinking is critical for planning. And for planning to happen you have to understand the environment (for example competitors or new technology paradigms) and understand where you stack against the current environment. The gap between the two can be low or high which can be analyzed through difference analysis or using a framework such as Blue Ocean Canvas. What you do to close the gap between your environment and your current status will require choosing a few select options and executing them. These set of actions you decide upon is called your strategy.

But a strategy isn’t a goal—goals only talk about why; a strategy also explains how. A strategy is choosing what to do and what not to do, a series of trade-off decisions, a quest for competitive advantage, about being different (not merely better), focusing a company’s resources on the most critical issues.

For example, companies that try to beat competitors by offering lower prices are pursuing a cost leadership strategy (Aldi, Walmart, IKEA, Southwest Airlines, McDonald's, etc.). On the other side of the spectrum are companies that want to win by being unique. These companies can charge higher prices because they are perceived differently (Apple, Whole Foods Market, BMW, Qatar Airways, Four Seasons Hotels, etc.).

Your strategic choices answer what trade-offs are you willing to make. In other words, if you do this, what won’t get done? Your choices also determine the allocation of organizational resources. The ultimate goal of a strategy is to help you gain a competitive advantage, which leads to better financial results.

Every strategic person should start with the following questions:

• What do you need to do to close the gap?
• What can you do to close the gap?

Once you investigate the following questions, evaluate the following questions:

• What effect your actions will have on narrowing the gap?
• And by when?

Once you have an inventory of possible actions to take, what you'll do to implement the strategy is your tactics. A strategy at one managerial level is the tactical concern of the next level. Understanding this critical because much confusion exists between what is strategy and what is tactics.

Another point to remember is certain tasks (actions) that will be performed now will affect future events. Ask yourself:

• What do I have to do today to solve or better avoid tomorrow's problem?

No strategy can help you conquer your vision, if you do not have monitoring in place. If you do not know where you are going, you will not get there. Andrew Grove who led Intel helped built the concept of Objective-Key-Results (OKRs) which can help monitor your strategy. They provide performance feedback and focus. Ask yourself the following questions:

• Where do I want to go? (This provides the objective.)
• How will I pace myself to see if I am getting there? (This answers milestones or key results.)

To illustrate an objective and a key result, consider this example: I want to go to a restaurant to pick food up for my guests who will be over in an hour. That is my objective. I know I can drive there through towns or highway, bike ride, walk or rideshare such as Uber. Each one of these options can be 10, 20, 30 or 40 minutes with varying costs. Getting there in x amount of time is a key result. OKRs provide feedback loop on how you are performing towards your strategic decisions. The set of objectives and the key results that support them funnels into your strategic initiatives.

Strategy is a plan of action to get from point A (current) to point B (future).

A great deal of strategy 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. — Graham Duncan

Mission: Why, Vision: What, Strategy: How, Segmentation: Who, Positioning: Where, Roadmap: When — Shreyas Doshi

Strategy is for shaping the world, rather than accepting the consequences. — Roger Martin

The essence of strategy is about choices. — Michael Porter

The essence of strategy is about choices,” Porter is known for saying. But if you have no strategy, how can you make strategic choices? Organizational choices determine the allocation of resources. And yet. “It sounds simple but many companies cannot do it. There is a fundamental inability to make the right choices,” “What tradeoffs are we willing to make? In other words, if we do this, what won’t get done?” Choosing tradeoffs and setting limits are hard. Organizations are often scared to forgo any initiative when a competitor is knee-deep in it. Partly, this can be traced back to human disposition. “Human nature makes it really hard to make tradeoffs, or to stick with them. The need for tradeoffs is a huge barrier. Most managers hate to make tradeoffs; they hate to accept limits. They’d almost always rather try to serve more customers, offer more features. They can’t resist believing that this will lead to more growth and more profit.” “People primed to feel busy….typically boosts one’s sense of importance.” People love to feel important regardless of the strategic impact of what they’re working on, e.g., the metastasis of meetings. Organizations, like people, have a hard time remaining true to the core of who they are especially as distractions and external pressures mount. The lure of initiatives launched by competitors is usually shiny but erroneous. It’s human nature to get caught up in competition. “When you ask a company, what success looks like, the answer is ‘being the best in my industry’. That is a natural human way to think, but in business competition, that is not the way to think about success. The reason is that there is no [one] best company.” Many organizations have lost sight of this fact. The basis of a successful strategy is, paradoxically, not universal. A successful strategy is idiosyncratic. — Michael Porter

To build a great company you have two options: 1) great strategy + slow pace 2) fast pace + good strategy. Since great strategy is not always in your control, focus on fast pace. — NA

Caution with strategy — People love using strategy as a disguise for non-action. An object at rest stays at rest, and an object in motion stays in motion. — NA

The arc of any celebrated business is underpinned by decisive strategy choices that are few and typically made amidst the profound uncertainty of rapid change. Get these crux choices wrong and you face a future of persistent pain, or even outright failure. To get them right, you must constantly attune your strategy to unfolding circumstances-ponderous planning cycles or handoffs to outside experts won’t get you there. — Hamilton Helmer

“Chance only favors the prepared mind.” Strategy serves best not as an analytical redoubt, but rather in developing the “prepared mind” of those on the ground. — Hamilton Helmer

A Strategy framework must be “simple but not simplistic.” Easier said than done, though. For a subject as complex as Strategy, “simple but not simplistic” is a high hurdle. — Hamilton Helmer

The one-sentence story of Intel is a single design win, then a decade and a half of very high Switching Costs, then Scale Economies. — Bill Mitchell

How can we walk away from requirements that we know to be true to pursue something that we think will help?” It turns out that is exactly what product strategy is all about—figuring out the right product is the innovator’s job, not the customer’s job. — Ben Horowitz

The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action. — Richard Rumelt

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. — Richard Rumelt

A leader’s most important job is creating and constantly adjusting this strategic bridge between goals and objectives. — Richard Rumelt

A strategy is like a lever that magnifies force. — Richard Rumelt

Bad strategy is 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. — Richard Rumelt

In your life, there are going to be constant demands for your time and attention. How are you going to decide which of those demands gets resources? The trap many people fall into is to allocate their time to whoever screams loudest, and their talent to whatever offers them the fastest reward. That’s a dangerous way to build a strategy. — Clayton M. Christensen

You can talk all you want about having a clear purpose and strategy for your life, but ultimately this means nothing if you are not investing the resources you have in a way that is consistent with your strategy. In the end, a strategy is nothing but good intentions unless it's effectively implemented. — Clayton M. Christensen

Frameworks to support strategic analysis:

Porter's Five Forces Analysis

It is not a boring business exercise. It helped the founders of Warby Parker create a company worth over $1B. Their analysis showed that the eyewear industry is dominated by a single player, Luxottica, which kept prices of prescription glasses artificially high. A pair was priced at around $300 even though it cost only $10-$20 to produce.

The best framework for industry analysis is Porter’s Five Forces. It evaluates five competitive forces, which influence industry attractiveness. The basic idea is that your product or company is not competing just with direct competitors but with everyone in the ecosystem, including customers, suppliers, substitutes, and new entrants. For example, you might have very few competitors but you still can’t make any profit because your suppliers have more negotiating power and so they capture most of the profits.

Overview of Porter’s Five Forces:

• Threat of new entrants: How hard is it to enter an industry?
• Bargaining power of buyers: How easily can buyers drive our prices down? How well can they negotiate?
• Threat of substitutes: How else can customers satisfy the same need?
• Bargaining power of suppliers: how easily can suppliers drive their prices up? How well can they negotiate?
• Rivalry amongst existing competitors: How many competitors are in an industry? How strong are they?

Competitor Analysis

Understanding competitors’ strategy, business model, and future plans help us design better products and experiences. We can anticipate how competitors will react to our innovations, and how we can differentiate better (create unique value for our users).

• The first step of competitor analysis is identifying competitors.
• Divide the competition into direct and indirect competitors. Direct competitors are companies that offer the same product (or service) and indirect competitors offer a different product that solves the same problem. For example, Uber’s direct competitors are taxi companies and Lyft. The indirect competitors are bike sharing services, public transport, car sharing services, and walking on foot.
• Gather data for insights. Divide data gathering into three buckets:
  • Business data: revenue, market share, etc.
  • Product data: product portfolio, features, etc.
  • Customers data: target group, reviews, etc.

7 Powers

Strategy is the study of the fundamental determinants of potential business value. Strategy (capitalized) is distinguished from strategy (lower case) and is divided into Statics (or “being there”) and Dynamics (or “getting there”).

Lower case strategy is a route to continuing Power in significant markets. Lower case "strategy" is also referred to as The Mantra.

Power is the set of conditions creating the potential for persistent differential returns. Power is the core concept of Strategy, and the book explains what it looks like when a company has power (Statics) and how a company can get power (Dynamics).

Each power creates a benefit (common) for the winning company, and a barrier (rare) for its competitors. Benefit is the way in which the power improves cash flows, such as through lower costs or ability to charge higher prices. Aka the magnitude of power. Barrier is the way that competitors are prevented from arbitraging the Benefit of the power. Aka the duration of power.

Hamilton Helmer covers 7 powers that companies can leverage on:

• Scale Economies: A business in which per unit cost declines as production volume increases.
• Network Economies: A business in which the value realized by a customer increases as the installed base increases.
• Counter-Positioning: A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
• Switching Costs: The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.
• Branding: The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.
• Cornered Resource: Preferential access at attractive terms to a coveted asset that can independently enhance value.
• Process Power: Embedded company organization and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment.

Further reading