April 23, 2021

📚️ Book Notes: Good Strategy Bad Strategy

It helps you understand what a good strategy looks like, in an unnecessary long text.

Here are my notes from Good Strategy Bad Strategy:

1. By September 1997, Apple was two months from bankruptcy. Steve Jobs, who had cofounded the company in 1976, agreed to return to serve on a reconstructed board of directors and to be interim CEO. Die-hard fans of the original Macintosh were overjoyed, but the general business world was not expecting much.
   Within a year, things changed radically at Apple. Although many observers had expected Jobs to rev up the development of advanced products, or engineer a deal with Sun, he did neither. What he did was both obvious and, at the same time, unexpected. He shrunk Apple to a scale and scope suitable to the reality of its being a niche producer in the highly competitive personal computer business. He cut Apple back to a core that could survive. Steve Jobs talked Microsoft into investing $150 million in Apple, exploiting Bill Gates’s concerns about what a failed Apple would mean to Microsoft’s struggle with the Department of Justice. Jobs cut all of the desktop models—there were fifteen—back to one. He cut all portable and handheld models back to one laptop. He completely cut out all the printers and other peripherals. He cut development engineers. He cut software development. He cut distributors and cut out five of the company’s six national retailers. He cut out virtually all manufacturing, moving it offshore to Taiwan. With a simpler product line manufactured in Asia, he cut inventory by more than 80 percent. A new Web store sold Apple’s products directly to consumers, cutting out distributors and dealers.
2. Fluff is superficial restatement of the obvious combined with a generous sprinkling of buzzwords. Fluff masquerades as expertise, thought, and analysis. As a simple example of fluff in strategy work, here is a quote from a major retail bank’s internal strategy memoranda: “Our fundamental strategy is one of customer-centric intermediation.” The Sunday word “intermediation” means that the company accepts deposits and then lends them to others. In other words, it is a bank. The buzz phrase “customer-centric” could mean that the bank competes by offering depositors and lenders better terms or better service. But an examination of its policies and products does not reveal any distinction in this regard. The phrase “customer-centric intermediation” is pure fluff. Pull off the fluffy covering and you have the superficial statement “Our bank’s fundamental strategy is being a bank.”
3. A hallmark of true expertise and insight is making a complex subject understandable. A hallmark of mediocrity and bad strategy is unnecessary complexity—a flurry of fluff masking an absence of substance.
4. Intel was known as a memory company and had developed much of the complex technology required to design and manufacture chips. But by 1984 it was clear that Intel could not match the prices of its Japanese rivals in DRAM. Losing money, Grove recalls, “We persevered because we could afford to.” Losing more and more money, senior management engaged in endless debates about what to do. Grove recalls the turning point in 1985 when he gloomily asked Intel’s chairman, Gordon Moore, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Moore immediately replied, “He would get us out of memories.” Grove recalls that he went numb and then finally said, “Why shouldn’t you and I walk out the door, come back and do it ourselves?”
5. A “threshold effect” exists when there is a critical level of effort necessary to affect the system. Levels of effort below this threshold have little payoff. When there are threshold effects, it is prudent to limit objectives to those that can be affected by the resources at the strategist’s disposal.
   For example, there seems to be a threshold effect in advertising. That is, a very small amount of advertising will produce no result at all. One has to get over this hump, or threshold, to start getting a response to advertising efforts. This means it may pay companies to pulse their advertising, concentrating it into relatively short periods of time, rather than spreading it evenly. It may also make sense for a company to roll out a new product region by region, concentrating its advertising where the product is new so as to spur adoption. Due to similar forces, business strategists will often prefer to dominate a small market segment over having an equal number of customers who represent only a sliver of a larger market. Politicians will often prefer a plan that delivers a clear benefit to a recognizable group over one that provides larger benefits spread more thinly across the population.
6. An important duty of any leader is to absorb a large part of that complexity and ambiguity, passing on to the organization a simpler problem—one that is solvable. Many leaders fail badly at this responsibility, announcing ambitious goals without resolving a good chunk of ambiguity about the specific obstacles to be overcome. To take responsibility is more than a willingness to accept the blame. It is setting proximate objectives and handing the organization a problem it can actually solve.
7. Compare the changes during your life to those that occurred during the fifty years between 1875 and 1925. During those fifty years, electricity first lit the night and revolutionized factories and homes. In 1880, the trip from Boston to Cambridge and back was a full day’s journey on horseback. Only five years later, the same trip was a twenty-minute ride on an electric streetcar; with the streetcar came commuting and commuter suburbs. Instead of relying on a single giant steam engine or water wheel to power a factory, producers switched to electric motors to bring power into every nook and cranny. The sewing machine put decent clothing within everyone’s reach. And electricity powered the telegraph, the telephone, and then the radio, triggering the first significant acceleration in communications since the Roman roads. During that fifty-year period, railroads knit the country together. The automobile came into common use and revolutionized American life. The airplane was invented and commercialized. Modern paved highways were built and agriculture was mechanized. IBM’s first automatic tabulating machine was developed in 1906. A huge wave of immigration changed the face of cities. Modern patterns of advertising, retailing, and consumer branding were developed—hundreds of famous brands, such as Kellogg’s, Hershey’s, Kodak, Coca-Cola, General Electric, Ford, and Hunt’s, date from this era. Most of the foundations of what we now see as the “modern world” were put in place, and great still-standing industrial empires were established. All of this took place in the fifty years between 1875 and 1925.
8. When change occurs, most people focus on the main effects—the spurts in growth of new types of products and the falling demand for others. You must dig beneath this surface reality to understand the forces underlying the main effect and develop a point of view about the second-order and derivative changes that have been set into motion. For example, when television appeared in the 1950s it was clear that everyone would eventually have one and that “free” TV entertainment would provide strong competition to motion pictures. A more subtle effect arose because the movie industry could no longer lure audiences out of their homes with “just another Western.” Traditional Hollywood studios had been specialized around producing a steady stream of B-grade movies and did not easily adapt. By the early 1960s, movie attendance was shrinking rapidly. What revived Hollywood film was a shift to independent production, with studios acting as financiers and distributors. Independent producers, freed from the nepotism and routines of the traditional studio, could focus on assembling a handpicked team to make a film that might be good enough to pull an audience off of their family-room sofas. Thus, a second-order effect of television was the rise of independent film production.
9. Schultz left Starbucks to start his own shop (Il Giornale). The new shop was a direct copy of an Italian espresso bar. In it, he “didn’t want anything to dilute the integrity of the espresso and the Italian coffee experience.” The seven-hundred-square-foot space had Italian decor and no chairs—it was a stand-up bar just like the bars in Milan. Shots of espresso were served in small porcelain cups. Opera music played in the background, the waiters wore formal shirts and bow ties, and the menu was peppered with Italian.
   Had Schultz stuck to this initial concept, Il Giornale would have remained a single small espresso bar. But, like a good scientist who carefully studies the results of experiments, Schultz and his team were alert to customer response. Il Giornale, once started, became a living experiment.
   One of the most important resources a business can have is valuable privileged information—that is, knowing something that others do not. There is nothing arcane or illicit about such information—it is generated every day in every operating business. All alert businesspeople can know more about their own customers, their own products, and their own production technology than anyone else in the world. Thus, once Schultz initiated business operations, he began to accumulate privileged information.
   As knowledge accumulated, he altered policies. He took the Italian off the menu, then eliminated the opera music. He knew the baristas were central, but he did away with their vests and bow ties. He departed from the Milanese model and put in chairs for the sit-down trade. Over more time, Schultz discovered that Americans wanted takeout coffee so he introduced paper cups. Americans wanted nonfat milk in their lattes, so, after a great deal of soul searching, he allowed nonfat milk. In the technical jargon of international business, he gradually “localized” the Italian espresso bar to American tastes.
   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. By 1990, the company was profitable. In 1992, it went public with 125 stores and two thousand employees.
   By 2001, Starbucks had become an American icon, with 4,700 worldwide outlets and $2.6 billion in revenue. The bulk of its revenues came from selling coffee drinks—the company called them handcrafted beverages. The rest came from the sale of coffee beans, some other food items in its coffee bars, and licensing agreements with food-service firms. Only a few years before, “coffee” had been seventy-five cents and came in a plastic foam cup. Now the urban landscape is peppered with Starbucks outlets, and the sight of young professionals sipping pint-sized three-dollar takeout lattes has become commonplace.
   Howard Schultz envisioned an Italian espresso bar in Seattle. He tested this hypothesis and found it wanting. But the test produced additional information, so he modified his hypothesis and retested. After hundreds of iterations, the original hypothesis has long since vanished, replaced by a myriad of new hypotheses, each covering some aspect of the growing, evolving business. This process of learning—hypothesis, data, anomaly, new hypothesis, data, and so on—is called scientific induction and is a critical element of every successful business.
10. 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.
    A new alternative should flow from a reconsideration of the facts of the situation, and it should also address the weaknesses of any already developed alternatives. The creation of new higher-quality alternatives requires that one try hard to “destroy” any existing alternatives, exposing their fault lines and internal contradictions. I call this discipline create-destroy.
    Trying to destroy your own ideas is not easy or pleasant. It takes mental toughness to pick apart one’s own insights. In my own case, I rely on outside help—I invoke a virtual panel of experts that I carry around in my mind. This panel of experts is a collection of people whose judgments I value. I use an internal mental dialogue with them to both critique my own ideas and stimulate new ones. I try to do this before putting my ideas before others.
    The panel of experts trick works because we are adept at recognizing and comprehending well-integrated human personalities. Thinking through how a particular well-remembered expert might respond to a problem can be a richer source of criticism and advice than abstract theories or frameworks.
    My own personal virtual panel of experts contains respected executives I have known and worked with, people who educated and trained me, colleagues I have worked with over the years, and certain people whose points of view emerge clearly from their own written work or from biography. When I face a problem, or have generated a first hunch, I turn to this panel and ask, “What is wrong with this approach to the situation? What would you do in this case?”

If you liked the above content, I’d definitely recommend reading the whole book. 💯

Until We Meet Again…
🖖 swap