Having conflicting goals, dedicating resources to unconnected targets, and accommodating incompatible interests are the luxuries of the rich and powerful, but they make for bad strategy. Despite this, most organizations will not create focused strategies. Instead, they will generate laundry lists of desirable outcomes and, at the same time, ignore the need for genuine competence in coordinating and focusing their resources. Good strategy requires leaders who are willing and able to say no to a wide variety of actions and interests. Strategy is at least as much about what an organization does not do as it is about what it does.
Introduction: Overwhelming Obstacles
Unfortunately, good strategy is the exception, not the rule. And the problem is growing. More and more organizational leaders say they have a strategy, but they do not. Instead, they espouse what I call bad strategy. Bad strategy tends to skip over pesky details such as problems. It ignores the power of choice and focus, trying instead to accommodate a multitude of conflicting demands and interests. Like a quarterback whose only advice to teammates is “Let’s win,” bad strategy covers up its failure to guide by embracing the language of broad goals, ambition, vision, and values.
A word that can mean anything has lost its bite.
Indeed, this is the most common complaint about “strategy.” Echoing many others, one top executive told me, “We have a sophisticated strategy process, but there is a huge problem of execution. We almost always fall short of the goals we set for ourselves.” If you have followed my line of argument, you can see the reason for this complaint. A good strategy includes a set of coherent actions. They are not “implementation” details; they are the punch in the strategy. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.
Part I: Good and Bad Strategy
The best answer to this puzzle is that the real surprise was that such a pure and focused strategy was actually implemented. Most complex organizations spread rather than concentrate resources, acting to placate and pay off internal and external interests.
Having conflicting goals, dedicating resources to unconnected targets, and accommodating incompatible interests are the luxuries of the rich and powerful, but they make for bad strategy. Despite this, most organizations will not create focused strategies. Instead, they will generate laundry lists of desirable outcomes and, at the same time, ignore the need for genuine competence in coordinating and focusing their resources. Good strategy requires leaders who are willing and able to say no to a wide variety of actions and interests. Strategy is at least as much about what an organization does not do as it is about what it does.
Fluff. Fluff is a form of gibberish masquerading as strategic concepts or arguments. It uses “Sunday” words (words that are inflated and unnecessarily abstruse) and apparently esoteric concepts to create the illusion of high-level thinking. Failure to face the challenge. Bad strategy fails to recognize or define the challenge. When you cannot define the challenge, you cannot evaluate a strategy or improve it. Mistaking goals for strategy. Many bad strategies are just statements of desire rather than plans for overcoming obstacles. Bad strategic objectives. A strategic objective is set by a leader as a means to an end. Strategic objectives are “bad” when they fail to address critical issues or when they are impracticable.
Looking at another section of the national security strategy, I found that the United States will “work with others to defuse regional conflicts.” This is an amazingly superficial political slogan. After all, are there really any other alternatives for dealing with regional conflicts? It seems unlikely that the United States could act alone all over the world to defuse regional conflicts, and it seems equally unlikely that we would completely ignore regional conflicts. Stating this slogan provided no useful guidance to anyone. Even worse, it relegated to the status of an annoying detail the fact that this approach was less and less effective.
Pull off the fluffy covering and you have the superficial statement “Our bank’s fundamental strategy is being a bank.”
Instead of long tables of numbers and bubble charts, we have a different type of ritualized formalism for producing “strategic plans.” The current fill-in-the-blanks template starts with a statement of “vision,” then a “mission statement” or a list of “core values,” then a list of “strategic goals,” then for each goal a list of “strategies,” and then, finally, a list of “initiatives.” (Template-style strategy is explored further in chapter 4, “Why So Much Bad Strategy?”)
In addition, DARPA has a very limited investment in overhead and physical facilities in order to prevent entrenched interests from thwarting progress in new directions. These policies are based on a realistic appraisal of the obstacles to innovation. They are a far cry from vague aspirations such as “retain the best talent” and “maintain a culture of innovation.”
Winston Churchill described Passchendaele as “a forlorn expenditure of valour and life without equal in futility.”
Bad strategy flourishes because it floats above analysis, logic, and choice, held aloft by the hot hope that one can avoid dealing with these tricky fundamentals and the difficulties of mastering them.
A second pathway to bad strategy is the siren song of template-style strategy—filling in the blanks with vision, mission, values, and strategies. This path offers a one-size-fits-all substitute for the hard work of analysis and coordinated action.
Why not forgo the arguments and do all three? There were two reasons. First, if one has a policy of resolving conflict by adopting all the options on the table, there will be no incentive for anyone to develop and sharpen their arguments in the first place. Only the prospect of choice inspires peoples’ best arguments about the pluses of their own proposals and the negatives of others’. As in the law, disciplined conflict calls forth stronger evidence and reasoning.
This statement is very appealing to many people and, at the same time, is quite obviously untrue. Ascribing the success of Ford and Apple to a vision, shared at all levels, rather than pockets of outstanding competence mixed with luck, is a radical distortion of history. Apple did not invent the personal computer—the technology was in the air and hundreds of entrepreneurs sought to design and build “computers for everyman.” Apple’s success derived, in large measure, from Steve Wozniak’s ability to cleverly trick the Motorola microprocessor at the center of the Apple II into directly driving the video and a floppy disk—using straight outputs from the CPU—rather than building expensive controllers. And, from the advent of VisiCalc, which gave people other than hobbyists a reason to buy an Apple II.
Good guiding policies are not goals or visions or images of desirable end states. Rather, they define a method of grappling with the situation and ruling out a vast array of possible actions.
The idea that coordination, by itself, can be a source of advantage is a very deep principle.
Part II: Sources of Power
It took some time, but I began to develop the idea that art could be, indeed, should be, a more serious subject than it was. Art is not just pretty objects; it is a vital part of human activity. In a university, people spend a great deal of effort studying languages and histories. We know all about marriage contracts in remote tribes and the histories of many peoples. But art has been treated as a sideshow. I decided that the Getty could change this. Instead of spending our income on buying art, we could transform the subject. The Getty would begin to build a complete digital catalog of all art, including dance, song, and textiles. It would develop programs to educate art teachers and host advanced research on art and society. The Getty would host the best conservation talent in the world and develop new methods of conserving and restoration. In this way, I decided, we would have an impact far beyond simply putting art on display.
One of a leader’s most powerful tools is the creation of a good proximate objective—one that is close enough at hand to be feasible. A proximate objective names a target that the organization can reasonably be expected to hit, even overwhelm.
Importantly, the moon mission had been judged feasible. Kennedy did much more than simply point at the objectives; he laid out the steps along the way—unmanned exploration, larger booster rockets, parallel development of liquid and solid fuel rockets, and the construction of a landing vehicle.
Unfortunately, since Kennedy’s time, there has been an increased penchant for defining goals that no one really knows how to achieve and pretending that they are feasible.
That is, if you are in charge of one link of the chain, there is no point in investing resources in making your link better if other link managers are not.
IKEA’s adroit coordination of policies is a more integrated design than anyone else’s in the furniture business. Traditional furniture retailers do not carry large inventory, traditional manufacturers do not have their own stores, normal retailers do not specify their own designs or use catalogs rather than salespeople, and so on.
No one did. Today, more than fifty years after IKEA pioneered its new strategy in the furniture industry, no one has really replicated it.
As one senior Xerox manager told me in 1977, “The factory sold its machines to the sales division at a transfer price that was double its full cost of production. Then, the sales division doubled or tripled that transfer price to set a price for the customer.”
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.
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.
A strategy is not necessarily what the CEO intended or what some executive says it is. Sometimes they are hiding the truth, sometimes they are misstating it, and sometimes they have taken a position as leader without really knowing the reasons for their company’s success.
“It is one of the big benefits of being a private company. When I first bought these lands from major oil companies, they were looking ahead one quarter or one year. They wanted to get the assets ‘off their books’ to make their financial ratios look better. We can do more with these businesses because we don’t suffer the crazy pressures that are put on a public company.”
Further study suggested that the juice might lower blood pressure and that its concentration of flavonoids might help prevent prostate cancer. Since 1998, the Resnicks have donated more than $30 million to research into the fruit’s health benefits.
The Resnicks developed a strategy of dramatically increasing the national demand for pomegranates.
Most industries, most of the time, are fairly stable. Of course, there is always change, but believing that today’s changes are huge, dwarfing those in the past, reflects an ignorance of history.
The work of discerning whether there are important changes afoot involves getting into the gritty details. To make good bets on how a wave of change will play out you must acquire enough expertise to question the experts.
In the words of my UC Berkeley junior-year physics professor, Nobel laureate Luis Alvarez, “This course is labeled ‘advanced’ because we don’t understand it very well.” He explained, “If there were a clear and consistent theory about what is going on here, we would call this course ‘elementary’ physics.”
The logic of the situation is counterintuitive to many people—the faster the uptake of a durable product, the sooner the market will be saturated. Many managers find these kinds of forecasts uncomfortable, even disturbing. As a client once told me, “Professor, if you can’t get that bump out of the forecast, I can find a consultant who will.”
Successful strategies often owe a great deal to the inertia and inefficiency of rivals.
None of this improvement came from a deep entrepreneurial insight or from innovation. It was all just management—just undoing the accumulated clutter and waste from years of entropy at work.
Sloan insisted that “General Motors’ car line should be integral, that each car in the line should properly be conceived in its relationship to the line as a whole.” More specifically, he wanted “quality competition against cars below a given price tag, and price competition against cars above that price tag.”
There was no sharp call for word processors or spreadsheets that ran one hundred times faster, but there was a very sharp demand for faster and more realistic graphics. Chief scientist David Kirk put it this way: “There is a virtually limitless demand for computational power in 3-D graphics. Given the architecture of the PC, there is only so much you can do with a more powerful CPU. But it is easy to use up one teraflop of graphics computing power. The GPU [graphics processing unit] is going to be the center of technology and value added in consumer computing.”
The benefit of a faster cycle is that the product will be best in class more often. Compared to a competitor working on an eighteen-month cycle, Nvidia’s six-month cycle would mean that its chip would be the better product about 83 percent of the time.
Plus, there is the constant buzz surrounding new product introductions, a substitute for expensive advertising. As a further plus, the faster company’s engineers will get more experience and, perhaps, learn more about the tricks of turning the technology into product.
Over the next five years, Nvidia continued its pattern of rapid releases, pushing the envelope in 3-D graphics capabilities. During the 1997–2001 period, Nvidia obtained extraordinary gains from integrating the graphics pipeline onto a single chip, achieving a 157 percent average annual gain in performance. From 2002 to 2007, it achieved an annual performance gain averaging 62 percent per year, about as much as was possible, given the general movement of semiconductor technology. Intel CPUs, for example, increased their processing power (millions of operations per second) at about the same rate per year during that period.
Spreading its resources too thin, it attempted to compensate by stretching the goals for its next high-performance chip beyond the competencies of its development process. In the last months of 2000, 3dfx closed its doors, selling its patents, brands, and inventory to Nvidia, where many of its talented engineers wound up working. A surface reading of history makes it look like 3dfx did itself in with too many changes of direction. The deeper reality was that Nvidia’s carefully crafted fast-release cycle induced 3dfx’s less coordinated responses. As Hannibal did to Rome at Cannae, Nvidia enticed its rival into overreaching.
Part III: Thinking Like a Strategist
A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment. As results appear, good leaders learn more about what does and doesn’t work and adjust their strategies accordingly.
Arabs began to brew coffee six hundred years ago, and the first European coffee shop opened its doors in Oxford, England, in 1652 when Isaac Newton was ten years old. The cause of the Enlightenment may have been the Copernican revolution and the Protestant Reformation, but coffee was its daily fuel.
Newton frequented the Grecian (where he was seen to dissect a dolphin); John Dryden held forth at Will’s. Much later, Adam Smith finished The Wealth of Nations at the British Coffee House (Cockspur Street) that was a London hangout for Scottish thinkers.
In the United States, coffee had emerged as a bland tea substitute to be drunk both at meals and at breaks throughout the day. In southern Europe, coffee was an alcohol substitute, taken in small strong doses at lively “bars.” Whether he knew it or not, Schultz wanted to do more than just open a coffee shop; he wanted to change American tastes and habits.
The delicacy in the situation was that Schultz’s proprietary information was only a glimmer in his mind, a mood, a feeling. Others, exposed to exactly the same information and experiences, did not have this insight or feeling. The privacy of his insight was both blessing and curse. Were it easily shared with others, Schultz himself would have been irrelevant. But because it could not be fully shared, it was difficult to convince others to back the project. Luckily for Schultz, his hypothesis could be tested without a vast investment. Opening a single espresso bar would cost several hundred thousand dollars, but not the hundreds of millions or billions that some ventures require.
In 1987, his company bought out Starbucks’ retail operations and adopted the Starbucks name. The new firm combined the old Starbucks business of selling dark-roasted arabica coffee beans with the new one of operating espresso bars.
In Europe, coffee roasters are distinct from restaurants. Although Starbucks was known as a coffee company, it was really a retailer. McDonald’s is a retailer, but it is never confused with a “beef” company! Yet Starbucks was called a “coffee company,” and Americans seemed to think that its coffee was special.
Europeans see Starbucks as “American coffee.” Americans think Starbucks is an Italian espresso bar.
By contrast, at Starbucks people drink coffee at tables or take it out. They drink from paper cups and there is a very long, complex menu of drinks Europeans have never heard of or wanted. The coffee is all Starbucks’ own brand and the store is company owned. And almost all of the drinks are milk based. In fact, viewed from Europe, Starbucks is more of a milk company than a coffee company and most of its drinks are simply coffee-flavored milk.
The most senior executive is sitting in the center of the front row, a good sign. When the senior person sits in the back, and to the side, I have learned that it generally signals an early exit rather than engagement.
This is predictable. Most people, most of the time, solve problems by grabbing the first solution that pops into their heads—the first insight. In a large number of situations this is reasonable. It is the efficient way to get through life. We simply don’t have the time, energy, or mental space to do a full and complete analysis of every issue we face.
The problem is that there might be better ideas out there, just beyond the edge of our vision. But we accept early closure because letting go of a judgment is painful and disconcerting. To search for a new insight, one would have to put aside the comfort of being oriented and once again cast around in choppy waters for a new source of stability. There is the fear of coming up empty-handed. Plus, it is unnatural, even painful, to question our own ideas.
Thus, when we do come up with an idea, we tend to spend most of our effort justifying it rather than questioning it.
Overcoming quick closure is simple in principle: you look for additional insights and strategies. But, most of the time, when asked to generate more alternatives, people simply add one or two shallow alternatives to their initial insight. Consciously or unconsciously, they seem to resist developing several robust strategies. Instead, most people take their initial insight and tweak it slightly, adding a straw-man alternative, or including options such as “walk away,” or “more study,” that are generic to any situation rather than being responsive to the special circumstances at hand.
And, with the advent of competition in a formerly monopolized industry, there was nothing keeping prices from falling to cost.
A quick summary is that a terrible industry looks like this: the product is an undifferentiated commodity; everyone has the same costs and access to the same technology; and buyers are price sensitive, knowledgeable, and willing to switch suppliers at a moment’s notice to get a better deal.
At that time many consultants’ presentations were simply comparisons between the stock performances of companies following one approach versus another. Why bother to do the hard work of evaluating the logic of a business strategy if the all-knowing stock market does a better job?
Like the voice of a deity, the “market” had spoken.
The telecom companies built too much fiber capacity. How much is too much? The combined plans in place for the Atlantic in 2001 amounted to 16,384 STM-1s. That would be enough capacity to allow thirty-five million people, half in Europe and half in America, to broadcast continuous real-time video coverage of their lives to one another, twenty-four hours a day seven days a week.
Two things went wrong. First, contrary to George Gilder’s forecast, Internet traffic over undersea cables grew much more slowly than did terrestrial traffic. Most Internet traffic was local, not international. Furthermore, the need for rapid response times pressed many high-usage websites to duplicate their servers city by city, obviating the need for huge intercontinental bandwidth.
The absurd idea that major corporations would be the driver of growth, or that consumers would pay high fees to companies who moved Internet traffic, met a messy death. Costs and prices fell even faster than traffic grew.
Why was this analysis ignored? Because the stock market promised something better.
But with little leverage, the 2000 crash in dot-com prices had only a minor impact on the larger economy. It is too-easy credit, showing up as overleveraged borrowers, that transmits shocks from company to company, from person to person, from sector to sector, and from nation to nation, turning what would otherwise be individual losses into a collective calamity.
Thus, for example, many people are aware of today’s outside-view statistic that talking on a cell phone while driving increases your accident risk by a factor of five—about the same as being drunk. But the inside view of the situation is “I am a good driver; those statistics don’t apply to me.” Similarly, we know that although most new restaurants fail, each entrepreneur thinks his or her new restaurant is different.
The original Jeffersonian ideal was a nation of citizen farmers, each owning the means of his or her own support. Today, this vision has morphed into one of a nation of homeowners, each working 100 days a year to pay their taxes and another 125 days a year to pay their mortgages.
For instance, even as the mortgage crisis began to unfold in late 2007, Treasury secretary Henry Paulson continued to extol America’s “deep and liquid” financial markets and preach the advantages of our system to China:
In praising America’s “deep and liquid” financial markets, the herd conveniently skipped over the giant bag of flammable gas keeping those markets buzzing—easy credit, overleveraging, a vast expanse of unpriceable derivative securities, long-term assets financed with overnight borrowing from trigger-happy counterparties, and huge top management bonuses for taking on hidden risks.