Good Strategy, Bad Strategy

Introduction: Targeted Approach

Strategy is about designing and executing a combination of punches: Where is the enemy? Where should we strike, and where should we not? How do we throw our punches? How can the first punch help the second and third?

The core of strategy = Analyzing the current situation + Guiding principles + Coherent actions

Part One: Good Strategy, Bad Strategy

1 Good Strategy is Unexpected

Good strategy is unexpected yet reasonable. For example, in 1997, when Steve Jobs returned to Apple, he drastically reduced the product line and focused on a few profitable products. When asked how to deal with the dominant Wintel alliance, he did not give an elaborate strategic speech or set grand growth targets; he simply smiled and said he would wait for the next wave.

Another example is the Gulf War's Operation Desert Storm, where the main forces were reported to be advancing slowly in the media, while another wave of troops stealthily penetrated the enemy from another direction.

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

2 Viewing Strengths with a Discoverer's Eye

The most fundamental strategy is the SO strategy—Strengths (S) plus Opportunities (O). So where do these strengths come from?

Shakespeare said well in Hamlet: "There is nothing either good or bad, but thinking makes it so." Viewing the world dynamically, strengths and weaknesses are relative. A classic example is the story of David and Goliath. From a secular perspective, David is weak and Goliath is strong; David is a newcomer, while Goliath is an experienced giant warrior. Yet David defeated Goliath with a sling.

The story of Walmart defeating Kmart illustrates discovering advantages from unexpected places. Traditional wisdom in American retail is that a diverse supermarket needs to be located in an area with at least 100,000 people. However, Walmart was able to open in less populated areas. Why? Because Walmart has more efficient supply chain management, creating an organic network between stores, while Kmart's stores were less interconnected, 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 to develop 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.

3 Bad Strategy

Bad strategy is formalism and has four basic characteristics:

1. Empty rhetoric == Fluff ==: Strategy should not be a pile of grandiose terms.

   • For example, a bank might say, "Our core strategy is to be a customer-centric intermediary," but essentially, it means "Our bank's core strategy is to be a bank."

2. Inability to confront challenges

   • If you cannot face resistance, there will be no strategy. Instead, you will only have an unattainable goal.
   • This reminds me that choosing root-level metrics must be done very carefully; == if it cannot be quantified, it cannot be improved. ==
   • A positive example is DARPA.

3. Mistaking goals for strategy

   • For instance, a company claims a 20/20 strategy—20% revenue growth this year and a profit margin of at least 20%. This is not strategy; it is merely a goal.
   • Metrics are not strategy.

4. Sub-goals that are irrelevant or unrealistic

   • Goals are the overall objectives; objectives are sub-goals.
   • Good strategy focuses limited energy and resources on a single or few sub-goals, achieving which can generate new advantages.
   • What constitutes a bad sub-goal?
     1. Putting everything together without prioritization.
     2. Setting unrealistic expectations.

4 Why Are There So Many Bad Strategies?

There are three main reasons:

1. Making choices is painful.

   • Voting leads to the voting paradox: democratic voting can yield irrational results like A > B > C > A. For example, when DEC was making strategic choices, there were three factions: focus on "servers"? Or "chips"? Or "solutions"? CEO Ken Olsen sought consensus, but essentially, you cannot make a sub-organization automatically give up its own enthusiasm. So in the end, everyone chose a compromise: "DEC is committed to being a leader in providing high-quality data products and services." This is just empty rhetoric.
   • Eisenhower promised to withdraw Soviet troops from Eastern Europe during his 1952 presidential campaign, but after winning the election and conducting extensive research, he made the difficult decision to abandon that promise.
   • Intel CEO Andy Grove faced a tough decision to shift from DRAM to microprocessor strategy.

2. People prefer to use templates without thinking.

   • For example, mistaking leadership for strategy. Leadership and strategy have similarities but should never be confused.
     • Leadership encourages self-sacrifice and transformation, making people feel good.
     • Strategy is about articulating what transformations are worth pursuing.
   • A similar confusion arises when having a strategy leads one to believe it is a good strategy. Countless books and tutorials provide templates for people to fill in mindlessly, resulting in numerous bad strategies.

3. People often believe in human dominance over fate, thinking attitude determines everything.

   • Zhang Defen's "Law of Attraction" creates a fantasy of "positive energy" regarding outcomes, leading people to neglect the real efforts that contribute to results, which is a form of mental opium. We should focus more on imagining the process of doing things, akin to simulation training.

5 The Core of Good Strategy

The core of good strategy consists of three basic elements:

1. Diagnosis: Simplifying problems, identifying challenges and obstacles.
2. Guiding principles: How to respond to challenges?
3. Coherent actions: A series of actions guided by principles that mutually reinforce each other.

Here are three examples:

In business, many challenges arise from external changes and competition.

1. Analyze the structure of specific competition rather than merely listing performance goals.
2. Choose guiding principles that can broadly address these situations and create advantages for the future.
3. Set up a series of actions and resource allocations that effectively realize the guiding principles.

In large organizations, challenges often come from within, which is why large organizations frequently undergo restructuring.

1. External competition is not as important as internal obstacles—outdated processes, bureaucracy, conflicts of interest, lack of cooperation, and outdated management styles.
2. Choose restructuring strategies that can innovate the organization.
3. Change the distribution of people and power through restructuring to improve processes.

The flywheel effect of Amazon.

1. Analyze that e-commerce and cloud services are high-cost and high-return, so reduce costs while ensuring returns.
2. Design the flywheel effect.
3. Build AWS's data centers and various cloud services around the flywheel effect, creating the infrastructure and e-commerce services for Amazon.com.

This point about "coherent actions" is particularly interesting.

• "Coherent complementary actions" means these actions directly help each other to create synergy. For example, as a manager, I introduce the principle that == "I will never make you do anything that does not help your core work." ==

• Strategic collaboration is not something arranged on the fly; it is deliberately designed and centrally imposed on the system.

• Centralization can be a bad thing, but a disorganized approach is also ineffective because different sub-organizations have different interests. For instance, in manufacturing, sales may prefer to please customers with urgent large orders, while production departments prefer stable, uninterrupted output over the long term. It is impossible to manage both urgent large orders and stable production simultaneously.

• Organizational collaboration is time-consuming and labor-intensive; do not pursue it without sufficient benefits. Smart organizations do not aim for 100% communication among everyone but rather achieve just the right amount of coordination.

Part Two: Sources of Strength

The effectiveness of good strategy lies in focusing limited energy on the points that yield the most results. Good steel is used at the cutting edge.

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

• Leverage: We cannot have infinite power to do anything, but there is always a certain amount of power to do some things. If this power is leveraged, we can achieve more with less effort. Leverage can come from several places:

  1. Forecasting. In competitive strategy, key forecasts often involve buyer demand and competitor responses.
  2. Pivot points. Pivot points can amplify capabilities and resources. For example, when 7-11 was in Japan, it discovered that "customers in different regions of Japan have their unique local tastes" and accordingly adjusted its supply based on feedback from staff and store managers.
  3. Concentration. Many things have a == threshold effect ==; if your continuous investment does not reach a certain threshold, the final effect will be no different from doing nothing. For example, in the advertising industry, continuous small-scale advertising is less effective than concentrated promotion in specific regions. Mao Zedong concentrated superior forces to eliminate the enemy's living strength.

• Grasp: Kennedy broke down the Apollo moon landing program into several clear, achievable sub-goals or milestones: unmanned exploration, larger propulsion rockets, parallel development of liquid and solid fuel rockets, and building landing vehicles.

• Chain systems. A system like a chain, where the weakest link determines the maximum pull the entire chain can withstand. To strengthen the entire system, each link must be reinforced. Such systems are extremely difficult to replicate, like IKEA. This investment requires leaders to withstand pressure to advance because the strengthening of the system is nonlinear; only when the last link is reinforced can the effects be seen.

• Design.

  • Hannibal's Battle of Cannae resulted in one of the most painful defeats in ancient Roman history and is also one of the deadliest battles in global history in a single day.
  • Analysis and design of complex systems: What elements does the system have? How do these elements interact? What trade-offs will there be for optimizing towards what goals?
  • For example, in the U.S. heavy truck market, a thorough analysis of how this system operates identified key persons who could decide purchasing choices, then optimized specifically for the needs of these key persons.

• Focus strategy, providing specific services for specific groups.

  • For example, Crown Cork & Seal Company survived in this competitive field by focusing on small urgent orders for small manufacturers.

• Growth. The growth of team size should not be deliberate but rather a natural result of the company's product growth.

  • Again, the aforementioned Crown company made acquisitions, which led to a stock price crash from $55 to$5. Similar cases include LeEco and Yahoo.

• Utilizing advantages. Comparative advantages are domain-specific; a champion runner may not excel in high jumping.

  • For instance, a startup that the author collaborated with wanted to transition from making fabrics to making clothes, mistakenly not realizing that the fabric for clothing and making clothes are entirely different fields.

• Dynamics: exploit a wave of exogenous change.

• Inertia, momentum, and entropy. Inertia can be utilized; for example, Microsoft transitioned from a B2B office suite to a B2B cloud. Closed systems decay due to entropy, which may explain why American companies are keen to bring in external managers.

Among these, the point about external change is particularly interesting. Generally speaking, there are two ways to gain 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 an armchair strategist after the fact. To make predictions before taking action requires a deep understanding of the past and present, seeing through phenomena to the essence, and thus being able to deduce the second and third steps. Unfortunately, most people can only see the present.

For example, after television emerged in the 1950s, everyone realized that the film industry would struggle, but 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 could attract audiences to theaters.

Cisco has occupied three competitive high grounds:

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

Signposts pointing to competitive high ground:

1. Fixed costs soar. For example, capital-intensive big productions give rise to large film companies. The development costs of large software systems give rise to large software companies.

2. Deregulation. For example, China's reform and opening up.

3. Prediction bias.

   1. The illusion of growth. For example, few can predict when a business or economy reaches its peak and begins to decline. Growth always has an end; a person who has bought one television is unlikely to buy a second immediately. == The faster sales grow, the faster the market saturates. ==
   2. The illusion of winner-takes-all. Yes, it is winner-takes-all, but not necessarily; large companies can suffer from internal issues, and external changes can occur.
   3. The illusion of winners always winning. For example, Yahoo.

4. The incumbent effect: unwilling to harm short-term interests for reform, similar to the Innovator’s Dilemma. B2B businesses cannot consider helping companies save money; they should help companies make money, or they will offend entrenched interests within those companies.

5. == Attractor state == or "end-state thinking," the state the market should reach. ==

Attractor state is an interesting new concept. Here, we elaborate on it. It differs from a company's vision in that a vision is unique to the company, while an attractor is the equilibrium that the entire market should reach.

It has two related concepts: accelerants and impediments.

• A typical accelerant is the "proof effect"; for example, Napster made everyone suddenly realize that 2.5MB of music could be downloaded, copied, and sent, while Bitcoin made everyone suddenly realize that investing in virtual currencies could lead to wealth.

  • Mao Zedong's idea that a spark can start a prairie fire: concentrating forces to eliminate larger enemies, occupying towns, can mobilize a broad base of support and establish a regime across several counties. This can amplify political influence and promote the actual effectiveness of revolutionary peaks.

• A typical example of an impediment is the public's fear and resistance to nuclear power plants, even though people know that nuclear energy is the trend of the future.

Let's analyze the external changes facing the newspaper industry.

Taking The New York Times as an example, the cost of printing newspapers is about two to three times the subscription revenue, and printing costs are mainly covered by advertising. Since 2009, two problems have emerged:

One is the rise of other easily accessible new media, leading to a decline in newspaper readership, and the other is that advertising in newspapers has been taken over by Google.

Differentiation in news media has three dimensions: space, frequency, and depth. The author believes that the market's attractor leans towards specialization in these niches rather than broad coverage. In the era of "Internet + newspapers," from a cost-reduction perspective, The New York Times should leverage its brand and collaborate broadly with various information sources rather than relying on a small number of professional journalists.

The more precise the reader base, the more advertising revenue can be generated.

Part Three: Thinking Like a Strategist

How to think like a strategist? The answer is "external perspective," thinking about why you think the way you do.

16 What Kind of Discipline is Strategy?

• Deductive vs. Inductive reasoning

  • The author meets with engineers from Hughes to formulate strategy.
    • Engineers dislike formulating strategy because their thinking is == deductive ==. They plan with certainty; they do not design a bridge that might hold a certain weight.
  • Deductive reasoning only works when one is omniscient; when faced with the unknown, it becomes ineffective.
  • == Deductive reasoning can stifle innovation. == Galileo's trial inspired the Enlightenment, which addressed how to deal with this issue through scientific empiricism.
  • Good strategy is based on hypotheses about what will work.

• Formulating and implementing strategy is a scientific inductive process: observing and learning, forming hypotheses, collecting data, validating hypotheses, proposing hypotheses, and repeating the cycle. When Howard Schultz founded Starbucks, he had a hypothesis that an Italian café could succeed in the U.S., where cheap coffee was prevalent. He started by investing hundreds of thousands of dollars in a small café to validate the hypothesis, continuously optimizing until achieving vertical integration.

17 Focus on the Process of Thinking

• Back to basics—list priorities.

  • Steel magnate Andrew Carnegie asked the father of scientific management, Taylor, "Young man, since you are my advisor, if you can tell me what management methods I should know, I will give you $10,000."$10,000 was a fortune in 1890. Taylor replied, "I would suggest you list the ten most important things and then focus on the first one." A week later, Taylor received a $10,000 check.
  • The author, when young, interviewed an executive and felt that there was nothing significant, just templates, and asked many template questions. However, the executive later felt that this conversation was the most valuable one he had had in the past year.
  • We cannot control thoughts, but we can control the process by which thoughts arise. The list itself may not be important; what matters is the process of generating the list.

• Where do strategic thoughts come from? Typically, ideas emerge directly from the mind, and people find it hard to realize how these ideas come about; strategic thinking often means stepping outside this shortsightedness.

  • The core solution: == Think about your thinking. ==

• There are tools that can help you think about your thinking.

  • Develop good habits.
    1. Use tools and processes to combat shortsightedness.
    2. Question your judgments, especially before genuinely engaging in competition.
    3. Record your judgments for future validation and review.
  • Tools and processes.
    • Strategic core: Diagnosis, guiding principles, coherent actions.
    • Q&A: Ask questions, analyze problems, provide answers. First ask why, then ask what.
    • Break and establish.
      • Do not list other options that a straw man might consider; set up a == virtual expert committee. ==
      • == Good strategies are often corner solutions. == This means emphasizing focus rather than compromise, concentrating on helping a subset of people solve specific problems without trying to solve every problem for everyone.
    • Contact review.
      • Three levels of review:
        • Recognizing one's own abilities and biases.
        • Recognizing others and how they will react to information and challenges.
        • Recognizing the market.
      • How to practice?
        • Rehearse.
          • Know as much as possible.
          • Identify important and unimportant factors.
          • Cultivate your viewpoint and be able to confidently disagree with others.
        • == Predict how people will behave before meetings. ==

18 Maintain Your Views

This chapter illustrates a problem through two examples: how to have opinions without being narrow-minded and stubborn. The answer is to introduce external perspectives.

• One example is that when evaluating a company, one should not only look at the stock price but also consider the fundamentals. Global Crossing made decisions solely based on stock prices and subjective desires, creating a closed loop between stock prices and company decisions, leading to a disastrous outcome. == Gödel's incompleteness theorem tells us that in sufficiently complex logical systems, there are always things that cannot be self-verified within the system. To judge right from wrong, one must rely on external knowledge. ==

• Another example is the 2008 financial crisis, a product of herd behavior combined with internal perspectives.