Good Strategy, Bad Strategy - Book Summary

Uncover the secrets of master strategists.

What drives the wedge between successful and failed strategies? It may surprise you to know, the two start off with similar objectives, but diverge dramatically in their results.

The subtle difference might stem from our perception of what constitutes a 'strategy'. Often, what's branded as strategy could just be a mirage, devoid of any substantive strategic substance!

Drawing wisdom from both inspiring successes and catastrophic failures, this narrative aims to immerse you in the art of strategic thinking. It invites you to dissect and understand what makes a strategy truly effective, and how you can apply such strategic acumen to your life or business.

As we embark on this exploration, you'll discover:

the trap of beguiling yet hollow 'fluff'

how an Italian revelation sparked the inception of a vast network of 4,500 coffee shops

how digging beneath the surface can unveil hidden potentials of a situation

how a strategic use of geometry led to the unfortunate demise of 50,000 Roman soldiers

and ultimately, you'll recognize the common threads that bind all great strategies and the missing links in the failed ones.

Strategy is not just about setting high targets, outlining visions, or coining catchy slogans.

So, you might be wondering, what truly constitutes a 'strategy'?

To illustrate, let's look at the case of a leading graphic arts company that declared their "2005 key strategy" to be a 20 percent boost in revenue and a 20 percent profit margin. Does this strike you as a robust strategy?

The answer is a resounding no. These are just lofty goals, which barely scratch the surface of a genuine strategy.

Goals or visions are standalone entities, while a strategy is an interconnected framework of ideas, encompassing a detailed plan to realize these goals.

Although a goal or a vision can serve as a good launching pad for a strategy, the strategy must offer a clear roadmap on how these goals will be realized.

For instance, if your football coach simply motivates your team to win the next match, it won't be helpful unless he shares specific tactics to secure that victory. In other words, a strategy needs to provide a concrete plan of action.

Unfortunately, many times, our goals are mistaken for strategies, and even motivational slogans and buzzwords are presented as strategies.

When you notice a conspicuous lack of simple, clear words, it's often a signal that 'fluff' – restating the obvious using high-sounding buzzwords – has been camouflaged as profound thought.

Take the case of a major retail bank's self-declared fundamental strategy: offering "customer-centric intermediation." Sounds sophisticated, doesn't it?

But let's decode this. "Intermediation" is just a fancy way to describe the bank's basic function of taking deposits and lending them out, while "customer-centric" implies focusing on customer needs.

Upon clearing away the fluffy jargon, we realize their "fundamental strategy" simply translates to "be a bank!"

What's glaringly absent in these business examples is a tangible action plan. Ultimately, without a concrete plan of action, what you have is not a strategy.

All effective strategies share a fundamental structure: a diagnosis, a guiding policy, and a series of consistent actions.

Even though each strategy has its unique characteristics, custom-tailored to address specific challenges, there exists a key element integral to every winning strategy: the kernel.

The kernel comprises three interconnected parts: the diagnosis, the guiding policy, and a consistent set of actions.

The diagnosis refers to a simplified understanding of a complex scenario, whereas the guiding policy charts out the tactical approach to address this diagnosis.

IBM's strategic shift in 1993 is an apt example of the first two components at play. IBM's earlier strategy of selling full-fledged computers was faltering amid an evolving industry, with competitors increasingly offering individual computer parts.

While the popular sentiment was to adapt to this industry fragmentation, CEO Lou Gerstner diagnosed the situation differently. Rather than breaking IBM into disparate parts, he aimed to consolidate them and transform IBM into a leading name in IT consulting.

To implement this diagnosis, they laid out a guiding policy that centered company resources on customer-centric solutions.

The final piece of the kernel puzzle is a set of coherent actions, which ensure the effectiveness of the guiding policy. Essentially, these actions have to align with one another to successfully realize the guiding policy's objectives.

Ford Motor Company's case underscores the importance of coherent actions. When Ford acquired Volvo, Jaguar, Land Rover, and Aston Martin, their new policy aimed to leverage these brands and gain from economies of scale by unifying the design and manufacturing processes.

However, this approach was incoherent because it undermined the unique appeal of these brands. A Volvo buyer doesn't seek a safety-enhanced Jaguar, just as a Jaguar enthusiast isn't looking for a sportier Volvo. This lack of coherence ended up damaging Ford's strategy.

A robust strategy necessitates a decisive commitment towards one particular direction.

Many of us prefer not to choose, wanting to keep all options open. But here's the stark reality — when it comes to crafting a strategy, indecisiveness is not an option. You'll have to make tough choices.

A powerful strategy requires you to identify the top priorities and channel your resources accordingly. Attempting to juggle everything at once will only set you up for failure.

Take the case of Digital Equipment Corporation (DEC), a computer manufacturer that found itself in troubled waters in 1988, struggling to compete against a new wave of PCs. The management was in a dilemma about the company's next course: should they focus on constructing ready-made systems, on creating customer solutions, or on advancing microchip technology?

The leadership was urged to find a middle ground, but they ended up paralysed by indecision, failing to commit to a singular direction.

Ultimately, their new CEO decided in 1992 to concentrate on chip manufacturing, but it was a classic case of too little, too late. DEC had missed the boat, lost the competitive race, and eventually, had to be acquired by a competitor.

Unavoidably, such hard choices might have detrimental effects on other business aspects and invite strong resistance. Nonetheless, it's critical to have the resolve to stick to your decision.

Consider Intel's story. The aggressive competition from Japanese manufacturers put Intel's CEO, Andy Grove, in a tight spot, forcing him to decide to pivot the company's focus towards microprocessor manufacturing.

This shift sparked resistance from many quarters within the company, particularly the salespeople and researchers who were comfortable with their old practices.

Though it would have been less confrontational to retract his decision in the face of this opposition, Grove stood his ground. The outcome? By 1992, Intel emerged as the world's leading semiconductor manufacturer.

Now that we've walked you through the essential components of a successful strategy, the next part will delve into how to best apply these strategic principles for optimum results.

To capitalize on your strategy, ensure it provides you a distinct advantage over your competitors.

Once you've framed your strategy, the next key question is, how do you convert it into a competitive edge?

In essence, your strategy should equip you with leverage against your competitors. In other words, you need to spot and seize opportunities before your rivals even have a chance to react.

However, gaining this anticipatory edge doesn't mean peering into the crystal ball and predicting the future. It's about attuning to the pulse of the present, recognizing emerging opportunities, and acting swiftly upon them.

Let's delve into Toyota's story to understand leverage better.

Despite reaping the benefits of surging SUV sales, Toyota shelled out over a billion dollars into engineering hybrid electric-gasoline technologies. Sounds counterintuitive, right? Not when you dig deeper.

Toyota's perceptive leadership realized that the dwindling fossil fuel reserves would eventually spike the demand for hybrid cars. And if they could lead the pack in developing hybrid technology, other manufacturers would likely license their system rather than build their own from scratch.

This strategic move created their leverage.

To detect an opportunity (and hence build leverage), you need to pinpoint your market's central pivot point — the most impactful route to success in your field.

The convenience store giant 7-Eleven achieved this in Japan when they discovered that Japanese consumers sought constant variety in soft drinks. Identifying this preference for variety as their central pivot point, 7-Eleven designed their strategy around it.

The average 7-Eleven store could only stock about 50 types of soft drinks — just a tiny fraction of the over 200 brands available in Japan. So, to maximize the variety on their shelves, they meticulously researched and documented local tastes. Each store then offered a range of brands that catered to those local preferences, enabling 7-Eleven to rotate a wide variety of drinks.

This pivot-centered strategy provided 7-Eleven with a substantial advantage over competitors whose stores didn't meet the Japanese market's demand for variety.

Strike a well-balanced chord between your resources and actions, tailored to your unique context.

With a solid strategy under your belt, you may feel poised for a breakthrough. However, there's still critical work left. Ask yourself — have I accounted for my resources, and does my strategy fit the realities of my current situation?

A sterling strategy consists of actions, grounded in your current context, that dovetail seamlessly to amplify your advantage.

To illustrate this point, let's wind back the clock and turn to the annals of ancient history — the savvy military strategies of the Carthaginian General Hannibal. When Hannibal took the audacious step to invade the Roman Empire in 216 BC, he found himself in a tight spot at the battle of Cannae, pitted against a Roman army that outnumbered his own by 85,000 to 55,000.

So, how did he counter this challenge? By crafting a strategy rooted in his resource constraints and dictated by his circumstances.

Hannibal ordered his soldiers to form an arc, the middle of which then fell back, simulating retreat as the Romans advanced. The Romans took the bait and chased the retreating soldiers into the gap left by Hannibal's army. As more Romans surged forward, they found themselves increasingly hemmed in, unable to wield their weapons effectively. The flanks of the arc then circled behind the Romans, initiating a lethal onslaught.

The battle ended with more than 50,000 Romans killed, while Hannibal's losses amounted to just around 5,000.

This grim tale has a vital lesson at its core. Hannibal painstakingly calibrated each action in his strategy to naturally follow from the preceding one. His deftly constructed strategy brought him a decisive victory against overwhelming odds.

The crème de la crème strategies, like Hannibal's, acknowledge the balance between resources, feasible actions, and the optimization of both. Like Hannibal, strive to formulate your strategy that leverages your limited resources as efficiently as possible.

Leverage the inherent dynamism of business landscapes to seize a commanding position in your market.

In a business world that never stands still, crafting strategies that capitalize on these shifts can be rewarding. But how do you bring this to life?

In many instances, the most significant impacts of change can be so glaringly apparent that they fail to offer you any distinct advantage. However, these pronounced changes often usher in a multitude of less apparent second-order effects that can open doors to fresh opportunities.

Consider the advent of television. It was fairly predictable that free television broadcasting would pose stiff competition for movie theaters.

But the cascade of second-order effects wasn't as easy to foresee. One such repercussion was felt by the Hollywood studios.

Previously, these studios enjoyed a captive audience base. But with television emerging as a new entertainment medium, their regular audience started to dwindle. To recoup this lost revenue, they started funding independent films that could cater to niche audiences and draw them back to the cinemas.

Independent filmmakers and writers reaped the benefits of this shift, receiving substantial funding from major studios to bring their niche film projects to life — a less evident second-order effect stemming from the proliferation of television.

However, not all markets are susceptible to frequent changes, especially those where advancements to existing technologies come at a prohibitive cost. In such scenarios, you can instigate change through innovation.

Take the example of the photographic film industry in the 1960s. Black and white photographic film had been refined to such an extent that further research investments didn't yield a significant return on investment. This hindered new entrants from challenging the industry behemoths like Ilford in the UK and Ansco in the United States.

Nevertheless, a few nimble players, including Kodak and Fuji, dared to disrupt the status quo. They ventured into the realm of color film, where innovation opportunities were aplenty. Through continuous enhancement of this new technology, these disruptors ignited a shift in the market and swiftly ascended to the top.

A well-crafted strategy leverages your competitive edge, constricting rivals' opportunities while exploiting your resources to the fullest.

With a grasp of the mechanics of strategy, you may be wondering — how does a strategy give substance to grand visions?

In most scenarios, a strategy accomplishes this by bolstering competitive advantage — the knack of creating more value at lower costs than your competition.

So, how do you construct a strategy that achieves this?

One route is through the deployment of isolation mechanisms, which confer you with a competitive edge by curbing your rivals' opportunities.

Consider Apple's iPhone as an example. It's fortified by multiple isolation mechanisms operating in synergy — the power of the brand, the company's credibility, and the complementary iTunes service, complete with its vast media library.

These elements make it challenging for competitors to create competing products. Their competition isn't just against the product, but also its powerful marketing apparatus, its comprehensive operating system, and its image.

Apple has cornered its market so effectively that the only crack in the armor a competitor might exploit is to sell a similar product at a lower price — a Herculean task by any measure.

Another strategy to secure a competitive edge is by generating higher demand for your resources.

The marketing maneuvers of the POM Wonderful pomegranate juice company serve as an excellent example. Initially, pomegranates were just a minor crop in their orchards. However, the owners observed that pomegranates yielded higher profits per acre than other crops.

This prompted them to invest in research, unearthing previously unknown health benefits of pomegranates. They then purchased 6,000 acres for pomegranate farming, multiplying US pomegranate production capacity six-fold.

Subsequently, they launched their pomegranate juice as a fresh fruit beverage, stressing its numerous health benefits. Being the largest producer of pomegranates, they were poised to benefit exclusively from the soaring demand they had stirred up, without having to share the spoils with any other manufacturers or competitors!

Now that you've gleaned insights into effective strategy implementation, the next part will show you the ropes to becoming a master strategist.

Embrace strategy akin to a science: construct strategic hypotheses, put them to the test, and fine-tune your ideas.

Armed with an understanding of the fundamentals of a sound strategy and the ways they have been applied in real-world contexts, how do you evolve into a proficient strategist?

Your journey begins with the creation of strategic hypotheses — educated assumptions about how a specific situation operates or could potentially operate. These assumptions serve as valuable guiding lights as you contemplate your strategy.

Take for example the hypothesis proposed by Howard Schultz, following a trip to Italy in 1983: "The unique Italian espresso experience can be replicated in America and would be well-received by the public."

Schultz was deeply impressed by the elegance and charm of Italian espresso bars, where patrons enjoyed premium coffee in a relaxed social ambiance. This stood in stark contrast to the American coffee scene, largely dominated by inexpensive, mediocre coffee.

Motivated by his hypothesis, Schultz decided to put it to the test. He persuaded his employers at a Seattle-based roasting company to allow him to set up a small espresso bar within their premises.

That company was none other than Starbucks.

Much like Schultz, you should assess your hypothesis to glean new insights and formulate fresh hypotheses rooted in those findings.

Initially, Schultz emulated the authentic Italian model. But he soon realized that Americans preferred to settle into chairs instead of huddling around the bar. So, he introduced chairs and tables.

Next, he observed that many American customers favored their coffee on the go. In response, he introduced paper cups.

So, what can we learn from Schultz's successful endeavor?

He experimented with his hypothesis, which involved recreating the Italian espresso experience in America. But to truly resonate with American sensibilities, he had to adapt and tweak it.

His company eventually acquired Starbucks' retail operations and trademark in 1987. By 2001, it had raked in a staggering $2.6 billion in revenue.

Indeed, strategy bears a striking resemblance to science: it calls for a plausible explanation or working hypothesis, which should be constantly reviewed and refined.

Steer clear of grave blunders by adopting an external viewpoint and drawing lessons from the failures of others.

Statistical data indicates that engaging in a phone conversation while driving hikes up the likelihood of a car accident by five times — essentially akin to driving under the influence of alcohol. However, despite being privy to this fact, many people, when confronted with a choice, tend to convince themselves, "It wouldn't happen to me, I'm an adept driver."

This tendency is termed the inside view — the proclivity to disregard the lessons others have gleaned from similar circumstances, clinging to the belief that our particular situation is distinctly different.

Quite a few of us fall prey to the inside view, often culminating in dire consequences.

The financial crisis of 2008 offers a telling example. In the run-up to the crisis, there was a pervasive belief that the economic histories of other nations no longer held relevance to contemporary America. Many surmised that the prowess of the Federal Reserve had successfully put an end to economic peaks and valleys.

This inside-view mindset led people to overlook inherent flaws in the system, spiraling into the worst financial crisis in over half a century.

To sidestep this perilous line of thinking, we need to strive for objectivity by carefully examining a situation from an outside view.

An effective strategy does this by posing questions such as: Why have others in a situation similar to mine tasted success or met with failure? Moreover, a robust strategy acknowledges that in a large majority of cases, our situation is far less exceptional than we tend to believe.

The financial crisis of 2008 could have been averted had analysts scrutinized financial history from an outside perspective, realizing that financial crises are inevitable. Similarly, just think — how many accidents could be prevented if people looked at the statistics from an outside view?

Sound strategies benefit enormously from paying heed to the experiences of others and the lessons drawn from those experiences.

Wrapping Up

The central takeaway from this book:

Becoming a proficient strategist is within everyone's reach. Understanding the pillars of a robust strategy and discovering the latent power within a situation—whether it's leveraging assets, maximizing resources, or foreseeing change—can steer you towards evolving into an accomplished strategist.