21 posts tagged with "strategy"

==Economic moat==: a business' ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share

Those who are NOT sources of an economic moat

• technology. technology will always be duplicated
• reading a lot. ==reading only makes people keep up.== Everyone reads a lot in this business. Some read more than others, but it does not necessarily make you more competitive.
• an MBA from a top school or any other degrees or designations. This often gives people a big paycheck even though it is the antithesis of what a great investor does.
• Experience. In order to play the game, some level of experience is necessary, but at some point, it doesn’t help anymore.

Those who are sources of an economic moat

1. economies of scale and scope. e.g. Wal-Mart, Home Depot, Lowe’s.
2. network effect. e.g. eBay, Mastercard.
3. intellectual property rights, e.g. patents, trademarks.
4. high customer switching costs. Paychex and Microsoft.

Jerry Neumann: A taxonomy of moats.

Due to the spotlight effect: ==Daniel Kahneman says “A remarkable aspect of your mental life is that you are rarely stumped,” and mistakenly believe “what you see is all there is.”== People only see what they see and want to see, making it hard to step outside of their own perspective. Therefore, it's important to frequently ask oneself, "Why do I think this way?"

The author identifies four major challenges in the decision-making process and proposes solutions:

1. Narrow framing <> Broaden options
2. Confirmation bias <> Test assumptions with facts
3. Short-term emotion <> View decisions from a distance
4. Over-confidence <> Prepare for mistakes

Ray Dalio also states, recognize that 1) the biggest threat to good decision-making is harmful emotions, and 2) decision-making is a two-step process (first learning and then deciding).

Examples illustrating how people often make poor decisions:

• Career choices, for instance, are often abandoned or regretted. An American Bar Association survey found that 44% of lawyers would recommend that a young person not pursue a career in law.
• A study of 20,000 executive searches found that 40% of senior-level hires “are pushed out, fail or quit within 18 months.”
• More than half of teachers quit their jobs within four years.
• One study of corporate mergers and acquisitions—some of the highest-stakes decisions executives make—showed that 83% failed to create any value for shareholders.

What to do? Solve it with a process. ==In decision-making, process is six times more important than analysis.==

• Because understanding our shortcomings is not enough to fix them.
• People’s decision-making processes are generally too simplistic.
  • The final decision maker should be both the challenger and the ultimate judge.
  • Franklin’s moral algebra
  • Pros-and-cons

There are two ways to gain a strategic high ground that is easy to defend and hard to attack:

1. Independent innovation
2. Riding the wave of change

It's easy to be a hindsight expert. To make predictions, one needs to deeply understand the past and present, see beyond the surface to grasp the essence, and thus be able to extrapolate to the next steps. Unfortunately, most people can only see the present.

For example, after the television emerged in the 1950s, everyone could realize that the movie industry was struggling, but very few could predict that the next step would be the rise of independent films. Independent filmmakers could break free from traditional studio ties and focus on making good films, as only good films can attract audiences to theaters.

Cisco rode three waves:

1. Software and microprocessors
2. Corporate networks
3. IP networks

Common trends include:

1. Skyrocketing fixed costs. For instance, capital-intensive big-budget films gave rise to major film companies. The development costs of large software systems led to the emergence of big software companies.
2. Deregulation. For example, China's reform and opening up.
3. Prediction biases.
   1. The illusion of growth. For instance, very few can predict when a business or economy peaks and begins to decline. Growth always has an endpoint; a person who has bought one television is unlikely to buy a second immediately. ==The faster sales grow, the quicker the market saturates.==
   2. The winner-takes-all illusion. Yes, there are winner-takes-all scenarios, but not necessarily; large companies can suffer from internal issues, and external changes can occur.
   3. The winner-always-wins illusion. For example, Yahoo.
4. Incumbent effects: reluctance to reform for short-term gains, similar to the innovator's dilemma.
5. ==Attractor state, or "endgame thinking," is the state the market should ideally reach.==

The attractor state is an interesting new concept. Here’s a detailed explanation. It differs from a company's vision in that a vision is unique to a company, while an attractor is the equilibrium that the entire market should achieve. It has two related concepts: accelerants and impediments.

• A typical accelerant is the "proof effect," such as Napster making people suddenly realize that 2.5MB of music could be downloaded and shared, or Bitcoin making people aware that investing in virtual currencies could lead to wealth.
• A typical impediment example is the public's fear and opposition to nuclear power plants, despite the knowledge that nuclear energy is the trend of the future.

Let’s analyze the newspaper industry.

Take The New York Times as an example; the printing costs of newspapers are about two to three times the subscription revenue, with printing costs primarily covered by advertising. Since 2009, two problems have emerged: the rise of easily accessible new media leading to a decline in newspaper readership, and the loss of advertising to Google.

Differentiation in news media has three dimensions: space, frequency, and depth. The author of this book believes that the market's attractor leans towards specialization in these niches rather than being broad and comprehensive. In the era of internet + newspapers, from a cost-reduction perspective, The New York Times should leverage its brand to collaborate widely with various information sources rather than relying on a small number of professional journalists. The more precise the readership, the more advertising revenue can be generated.

The key to an effective strategy lies in channeling limited energy into the points that can generate the most impact. Good resources should be used where they matter most.

So we must ask, where does this energy come from? Here are some common sources:

• leverage
• proximate objectives
• chain-link systems. Systems without weaknesses are extremely difficult to replicate, such as IKEA.
• design
• focus strategy, providing specific services for particular groups
• growth. The increase in team size should not be deliberate but rather a natural result of the company's product growth.
• advantage. Comparative advantage is domain-specific; a champion runner may not excel in high jumping.
• dynamics. Exploit a wave of exogenous change.
• inertia and entropy.

• "Coherent and complementary actions" mean that these actions directly support each other to create synergy. For example, as a manager, the principle behind introducing processes imposed on others is, ==“I will never ask you to do anything that does not help you in your core job.”==
• Strategic collaboration is not arranged on the spot; it is deliberately designed and centrally imposed on the system.
• Centralization is a bad thing, but a completely fragmented approach is also ineffective, as the interests of various sub-organizations differ. For instance, in manufacturing, sales may prefer to please customers with expedited large orders, while the production department prefers to output steadily and undisturbed over the long term. It is impossible to handle both urgent large orders and maintain steady production simultaneously.
• Organizational collaboration is time-consuming and labor-intensive; if there are not enough benefits, it should not be pursued. Smart organizations do not aim for 100% communication among everyone but rather strive for just the right amount of coordination.

Three Fundamental Elements

1. Diagnosis: Simplifying the problem and identifying challenges.
2. Guiding Policies: How to respond to challenges?
3. Coherent Actions: A series of actions that mutually reinforce each other under the guidance of principles.

Examples

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

1. Diagnosing the specific structure of the challenge rather than simply naming performance goals.
2. Choosing an overall guiding policy for dealing with the situation that builds on or creates some type of leverage or advantage.
3. Designing a configuration of actions and resource allocations that implement the chosen guiding policy.

In many large organizations, the challenge is often diagnosed as internal.

1. 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.
2. Reorganization and renewal.
3. Changes in people, power, and procedures.

Amazon

There are mainly three reasons:

1. Making choices is a painful process
   • When DEC made strategic choices, there were three factions: "Boxes," "Chips," and "Solution." The voting led to Condorcet’s paradox. The voting paradox: democratic voting can yield irrational results like A > B > C > A. CEO Ken Olsen sought consensus, but fundamentally, you cannot make a sub-organization automatically give up its own enthusiasm. So in the end, everyone chose a compromise solution: "DEC is committed to providing high-quality products and services and being a leader in data processing." This is just empty rhetoric.
   • When Eisenhower campaigned for president in 1952, he promised to withdraw the Soviet Union from Eastern Europe, but after winning the election and conducting extensive research, he made the difficult decision to abandon that promise.
   • Intel CEO Andy Grove shifted the company from producing dynamic random access memory (DRAM) to focusing on microprocessors.
2. People prefer to use templates without thinking
   • Max Weber, the father of sociology, believed in distinguishing formal leaders from those who lead by personal charisma.
   • Peter Drucker, one of the foremost thinkers about management, said, "Effective leadership doesn’t depend on charisma. Dwight Eisenhower, George Marshall, and Harry Truman were singularly effective leaders, yet none possessed any more charisma than a dead mackerel.… Charisma does not by itself guarantee effectiveness as a leader."
   • The academic requirements for leadership generally are:
     1. Develops or has a vision
     2. Inspires people to sacrifice (change) for the good of the organization
     3. Empowers people to accomplish the vision
   • Leadership and strategy have commonalities, but they must not be confused. For example:
     • Leadership encourages self-sacrifice and personal transformation while feeling good about it.
     • Strategy is about articulating what kind of transformation is worth pursuing.
   • A similar confusion arises when having a strategy is mistaken for having a good strategy. Countless books and tutorials provide templates for people to fill in mindlessly, resulting in numerous bad strategies.
3. New Thought: People often believe that human will can overcome all, thinking that attitude determines everything
   • Zhang Defen's "Law of Attraction," the New Thought movement, and the fantasy of "positive energy" regarding outcomes lead people to neglect the real efforts that contribute to results, serving as a form of spiritual opium. We should focus more on imagining the process of doing things, which is akin to simulation training.

A bad strategy is formalism, characterized by four fundamental traits

1. Empty rhetoric ==obfuscation== ==fluff== Strategy should not be a mere accumulation of grandiose terms.

   • e.g. a major bank “Our fundamental strategy is one of customer-centric intermediation.” = “Our bank’s fundamental strategy is being a bank.”

2. Failure to confront challenges

   • 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.
   • This reminds me that the choice of root level metrics must be very careful, ==If you can't measure it, you can't improve it==
   • A positive example is DARPA.

3. Mistaking goals for strategy

   • e.g. a 20/20 goal - We will grow revenue by at least 20% each year. We will maintain a profit margin of at least 20%.
   • Metrics are not strategy.

4. Sub-goals that are irrelevant or unrealistic

   • Goal is the overall objective, Objective is the sub-goal.
   • 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.
   • What kind of sub-goals are bad sub-goals?
     1. Dog’s Dinner Objectives - putting everything together without distinction.
     2. Blue-Sky Objectives - unrealistic aspirations.

There is nothing either good or bad, but thinking makes it so. by Shakespeare in Hamlet

The legend of David and Goliath. From a secular perspective, David is weak and Goliath is strong; David is a novice, while Goliath is an experienced giant warrior. Yet, David defeats Goliath with a sling.

The story of Walmart defeating Kmart. The traditional wisdom in American retail is that a supermarket with a wide variety of products needs to be located in an area with at least 100,000 people. However, Walmart can operate in areas with smaller populations. Why? Because Walmart has more efficient supply chain management, creating an organic network between its stores; whereas Kmart's stores are not as closely connected, leading to higher inventory management costs and less bargaining power in procurement.

During the Cold War arms race, Andy Marshall's strategy against the Soviet Union was to develop comparative advantages by leveraging America's economic and technological strengths. This involved developing technologies that would be costly for the opponent to counter but would not pose a threat to the U.S., such as improving missile accuracy and developing silent submarines. Ultimately, this strategy led to the downfall of the Soviet Union.

A good strategy is both surprising and reasonable. For example, in 1997, Steve Jobs' turnaround strategy upon returning to Apple involved drastically reducing the product line and focusing on a few profitable products. When asked how to deal with the powerful Wintel alliance, he did not engage in grand strategic speeches or set ambitious growth targets; he simply smiled and said, "I will just wait for the next big thing."

Trying to do everything and believing everything is important is equivalent to believing that nothing is important. Good leaders need to know not only what to do but also what not to do.