Mental Pivot

Notes and observations from a lifelong pursuit of learning.

Insights and interesting reads delivered straight to your inbox.
Sign up for the free Mental Pivot Newsletter.

Book Notes: “Good Strategy Bad Strategy” by Richard P. Rumelt


Good Strategy Bad Strategy by Richard P. Rumelt (2011) explores the many facets of strategy, primarily from a business perspective. The crux of strategy is connecting goals with actions. In the words of the author, “the core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.” It’s a simple idea that is poorly understood by most. One need only look at the abundance of bad or absent strategy in the world to recognize this. As Rumelt notes, simply having a strategy represents a significant competitive advantage; most organizations and individuals lack any kind of strategy whatsoever.

The book is divided into three parts. Part 1 examines “good” and “bad” strategies. Good strategies are those that underpin goals with specific actions. Bad strategies are those that mistake a vision for a strategy or substitute ambition for strategy. For instance, a performance goal—such as increasing sales by 50%—does not comprise an effective strategy. Absent a specific and coherent set of actions, the sales goal, lacking a reasonable action plan, carries a higher likelihood of failure.

Part 2 explores sources of power in crafting a good strategy. These sources of power comprise abstract concepts that can be used to create strategic advantages. These include the ideas of leverage (the magnification of focused effort), design (planning, anticipation, and coordination), and dynamics (exploiting external technological, regulatory or industry changes to gain “high ground”). Sources of power can be deployed individually or in concert. The industry-leading 3D graphics chipmaker, Nvidia, is presented as a case study on how to combine many of the sources of power into a coherent business strategy.

Part 3 considers the mindset conducive to effective strategy. Rumelt asks the reader to approach business thinking with the perspective of a scientist and the rigor of empiricism and inductive reasoning. He also warns us about specific cognitive blindspots and counterproductive tendencies.

Good Strategy Bad Strategy is a decent read. Rumelt includes a good mix of contemporary business cases alongside interesting historical examples like the Battle of Trafalgar and the Battle of Cannae. The business cases covering Crown, Cork & Seal, General Motors, and Nvidia were particularly insightful. I found the book slightly less enjoyable than John Lewis Gaddis’ book On Grand Strategy (see my notes), perhaps owing to the latter’s stronger emphasis on historical examples. Rumelt’s book, however, is a far more practical and prescriptive exploration of strategy compared to Gaddis. As such, it’s best suited for those interested in the application of strategy and strategic thinking in a business setting.

Pros: Introduces solid, actionable concepts like the “strategic kernel” and the “sources of power.” Includes several excellent stories and case studies that I haven’t seen in similar books.

Cons: The writing is uneven and even clunky at times. Part three isn’t as cohesive as parts one and two.

Verdict: 6/10


Introduction: Overwhelming Obstacles

  • Example: Napoleon threatens invasion of England in 1805 and the Battle of Trafalgar:

    • Standard tactics of the time were for opposing fleets to line up and exchange broadside barrages of cannon fire.

    • The English Lord Nelson broke the British fleet into two columns and drove them at the Franco-Spanish fleet hitting them perpendicularly.

    • Nelson adopted this strategy because:

      • His fleet was at a numerical disadvantage.
      • The Franco-Spanish fleet wasn’t as well-trained and wouldn’t be able to adapt to his approach.
      • The goal was to break the enemy fleet’s coherence.
    • Franco-Spanish fleet lost 22 ships and the British lost none (though Nelson was mortally wounded).

  • “The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.”

  • Leadership is the act of identifying key challenges and developing a coherent approach to overcoming them.

    • Per the lessons from the Gaddis book: Identify how to accomplish your aims within the constraints of your means.
  • Example: General David Petraeus in Iraq (2007).

    • Strategy: The military could better combat an insurgency if the civilian population supported the US-supported Iraqi government.
    • To do this Petraeus shifted the military focus from urban patrols to protecting the civilian population.
    • He believed that with their safety ensured, civilians would volunteer information to help combat the insurgency.
  • Good Strategy: Underpins a goal with a specific set of actions for overcoming the obstacles to obtaining the goal.

    • “A strategy is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge.
    • You cannot divorce the goal from the specific action.
    • Strategy is not just “the big picture.”
  • Bad Strategy: An empty goal or vision that is not backed up by attention to details, overcoming specific problems, and an actionable plan.

    • Ambition is not strategy.
    • Bad strategy often fails to account for execution.
    • Performance goals are not, on their own, sufficient (e.g., “our strategy is to increase sales by 50%”—that’s an ambition).
  • The kernel of strategy: A logical strategic structure that contains three elements:

      1. A diagnosis
      2. A guiding policy
      3. Coherent action

Part I: Good and Bad Strategy
Chapter 1: Good Strategy Is Unexpected

  • Just having a strategy is a huge advantage because most of your competition won’t have one.

  • “A good strategy has coherence, coordinating actions, policies, and resources so as to accomplish an important end.”

  • Example: Apple Inc. in the late 1990s.

    • After the 1995 release of Microsoft Windows 95, Apple fell into a death spiral.
    • Steve Jobs returns to Apple in 1997 and makes radical changes to the company by reducing Apple’s product lines and cutting Apple to its core business to survive.
    • Jobs jettisons non-essential business units and projects: peripherals, supplemental software, handheld devices, etc.
    • “He redesigned the whole business logic around a simplified product line sold through a limited set of outlets.”
    • Once Apple thwarted bankruptcy and had been restructured and refocused, Jobs waited for the next big thing to make his move.
  • Example: The First Gulf War (1991).

    • After the invasion of Kuwait by Saddam Hussein, the USA and a coalition of 33 countries planned to liberate the country.

    • The Iraqis spent half a year fortifying defensive positions in Kuwait with 500,000 troops and 4000 tanks.

    • General Norman Schwarzkopf devised a two-pronged plan of attack:

      • Aerial bombardment was used to reduce the Iraqi ground capabilities.
      • A large coalition contingent would move slowly north into Kuwait to entice Iraqi troops southward.
      • A “left hook” ground movement was used to rapidly mobilize 250,000 coalition troops north and then east to hit the flank of the Iraqi army.
    • The strategy employed by Schwarzkopf was classic “envelopment.” Per the Army’s Operations manual: “Envelopment avoids the enemy’s front, where its forces are most protected and his fires most easily concentrated. Instead, while fixing the defender’s attention forward by supporting his diversionary attacks, the attacker maneuvers his main effort around or over the enemy’s defenses to strike at his flanks and rear.”

  • Focused effort is surprising because it is not the norm. “Most complex organizations spread rather than concentrate resources, acting to placate and pay off internal and external interests.”

    • Good strategy is unexpected.
    • Schwarzkopf, for instance, had to manage the desires and divergent goals of air force, marines, army, coalition units, politicians and more to make his plan a reality.
  • Bad strategy involves conflicting goals, using resources for unconnected ends, and accommodating incompatible interests.

  • “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 doe as it is about what it does.”

Chapter 2: Discovering Power

  • Good strategies are often discovered through new sources of strength and weakness.

  • Example: The biblical story of David and Goliath (ca. 1030 BC).

    • Goliath was huge, strong, and wore heavy armor.
    • David was small and nimble. He had to use his mobility, speed, and cunning to defeat Goliath.
    • David found a vulnerability in Goliath’s armor and exploited it by using his sling to strike an unprotected part of the warrior’s forehead.
  • Example: Wal-Mart successful retail strategy.

    • Wal-Mart built an effective network of stores that shared data, management directives, and distribution.

    • Conventional wisdom held that a full-line discount store needed a population base of at least 100,000 people.

    • Sam Walton turned the conventional wisdom on its head: “The network replaced the store. A regional network of 150 stores serves a population of millions…he broke the old definition of a store.”

      • Wal-Mart developed its own information systems and used the data to increase efficiency and negotiate better discounts (by sharing data with suppliers).
      • “Wal-Mart’s policies fit together—the bar codes, the integrated logistics, the frequent just-in-time deliveries, the large stores with low inventory—they are complements to one another, forming an integrated design.”
    • Author recommends not only looking at the winning firm (Wal-Mart) but its failed competition, Kmart.

      • Competitors cannot copy individual pieces of Wal-Mart’s strategy. The pieces only work as a part of a larger, coherent strategy.
      • Kmart didn't embrace a network strategy. Stores were effectively islands where store managers had authority to pick product lines, set prices, etc.
    • The cost of decentralization is lost coordination across units (the integration vs. modular strategy argument).

  • Competitive advantage: An individual or organization’s area of competency relative another party.

    • “Use your relative advantages to impose out-of-proportion costs on the opposition and complicate his problem of competing with you.”
    • Example: The US exploited its technological and financial advantages in the Cold War with the Soviet Union.

Chapter 3: Bad Strategy

  • “Bad strategy is not simply the absence of good strategy. It grows out of specific misconceptions and leadership dysfunctions.”

  • The four major hallmarks of bad strategy:

    1. Fluff: “Fluff is a form of gibberish masquerading as strategic concepts or arguments.” It is the illusion of high-level thinking.
    2. Failure to face the challenge: “Bad strategy fails to recognize or define the challenge.”
    3. Mistaking goals for strategy: “Many bad strategies are just statements of desire rather than plans for overcoming obstacles.”
    4. 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.”
  • Strategic goals are often confused with strategy:

    • A goal is a desired outcome.
    • A strategy includes a goal as well as a plan to accomplish the goal.
    • Example: George W. Bush’s policy of preemptive war (a response to the threat of “weapons of mass destruction”) would have been well served by stronger intelligence.
  • “Bad strategy is long on goals and short on policy or action. It assumes that goals are all you need. It puts forward strategic objectives that are incoherent and, sometimes, totally impracticable. It uses high-sounding words and phrases to hide these failings.”

  • “A strategy is like a lever that magnifies force…you might be able to drag a giant block of rock across the ground with muscles, ropes, and motivation. But it is wiser to build levers and wheels and then move the rock.”

  • Planning is essential, but it should not be confused for the totality that is strategy.

  • Author distinguishes between goals and objectives:

    • Goals are overall values and desires.

    • Objectives are specific operational targets.

    • Example: United States in the 21st century:

      • Goals: Freedom, justice, peace, security, and happiness.
      • Objectives: Defeat the Taliban, rebuild domestic infrastructure.
      • Strategy transforms vague goals into concrete and actionable objectives.
      • Leadership is responsible for guiding the “strategic bridge” between goals and objectives.
  • “A long list of ‘things to do’…is not a strategy. It is just a list of things to do.”

  • “When a leader characterizes the challenge as underperformance, it sets the stage for bad strategy. Underperformance is a result. The true challenges are the reason for the underperformance.”

Chapter 4: Why So Much Bad Strategy

  • Bad strategy results from the inability to make an active or decisive choice.

  • Three common pathways to bad strategy:

    1. A failure to choose
    2. Template-style strategy
    3. New thought: the mistaken belief that attitude is sufficient
  • Failing to choose:

    • “Strategy does not eliminate scarcity and its consequence—the necessity of choice. Strategy is scarcity’s child and to have a strategy, rather than vague aspirations, is to choose one path and eschew others.”

    • It is psychologically difficult for us to say “no” to opportunities. [Me: For example, the cult of “optionality.”]

    • Strategy moves from the general to specific. Specificity is the result of choice and narrowing options.

    • “Any coherent strategy pushes resources toward some ends and away from others.”

    • Example: Intel faced the challenging decision to move away from producing DRAM (memory chips) to microprocessors. This ultimately was a good move for them, but risky at the time since DRAM was their main revenue-generating product.

    • “Unless collective ruin is imminent, a change in strategy will make some people worse off. Hence, there will be powerful forces opposed to almost any change in strategy.”

      • Beware of universal buy-in solutions which often neglect to make hard choices.
      • Universal buy-in trades focus for collective happiness.
  • Template strategies:

    • The charismatic leader formula:

      1. A leader develops a grand vision.
      2. A leader inspires others.
      3. A leader empowers others.
    • Be wary of conflating leadership with strategy: “Leadership and strategy may be joined in the same person, but they are not the same thing.”

    • “To achieve great ends, charisma and visionary leadership must almost always be joined with a careful attention to obstacles and action, as Gandhi was able to do in India.”

    • The template system of strategic planning (conducted by the charismatic leader):

      1. Vision: Create an organizational future goal.

        • Example: Dow Chemical, “To be the most profitable and respected science-driven chemical company in the world.”
        • Example: Enron, “To become the world’s leading energy company.”
      2. Mission: Statement of purpose.

        • Example: Dow Chemical, “To passionately innovate what is essential to human progress by providing sustainable solutions to our customers.”
      3. Values: Organization principles.

        • Example: Dow Chemical, “Integrity, Respect for People, and Protecting our Planet.”
      4. Strategies: Aspirations and goals masquerading as strategies.

        • Example: Dow Chemical, “Preferentially invest in a portfolio of technology-integrated, market-driven performance businesses that create value for our shareholders…”
    • Template-style approaches lead to fluff and empty strategy.

  • New thought:

    • The “New Thought” movement from the late 19th century promoted the idea that thinking about success leads to success.
    • Elements of New Thought permeated into strategic thinking, self-help, business, and leadership literature.

Chapter 5: The Kernel of Good Strategy

  • The elements of the kernel of strategy:

    1. The diagnosis: This is the understanding of the challenge or obstacle that is faced. The diagnosis simplifies and clarifies the situation.
    2. The guiding policy: This is the plan selected to overcome the challenge identified by the diagnosis. It defines a method for dealing with the situation. A good policy looks for sources of advantage.
    3. The set of coherent actions: These are the specific action steps that are taken, in accordance with the guiding policy, to overcome the challenge.
  • Example: A physician.

    • The doctor makes a patient diagnosis after examining symptoms and running tests.
    • The doctor selects a therapeutic approach as a guiding policy for treatment.
    • The doctor’s specific prescriptions—diet, therapy, medication, etc.—comprise the coherent actions.
  • Example: A business.

    • The business identifies the actual challenge rather than naming performance goals.
    • The business selects a policy for dealing with the situation to create leverage or advantage.
    • The business takes specific actions and allocates resources to implement the guiding policy.
  • “Good strategy is not just ‘what’ you are trying to do. It is also ‘why’ and ‘how’ you are doing it.”

  • “Strategic actions that are not coherent are either in conflict with one another or taken in pursuit of unrelated challenges.”

  • Coordination is an underrated source of strategic advantage.

Part II: Sources of Power
Chapter 6: Using Leverage

  • Leverage The ability to focus energy on a pivotal objective to produce outsized results and a cascade of favorable objectives.

    • Archimedes (Greek mathematician): “Give me a lever long enough, a fulcrum strong enough, and I’ll move the world.”
  • “Strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and making a concentrated application of effort.”

    • Anticipation: Considering possible habits, behaviors, reactions, and outcomes in a given scenario.
    • A pivot point magnifies the effect of focused effort and resources.
    • Concentration: there is a critical level of effort required to affect a system or outcome (a ‘threshold effect’).
  • Example: The Getty Trust under Harold William’s tenure.

    • Williams had sufficient resources to purchase art of the Getty collection, but this would have been a “me too” move indistinguishable from other institutions.
    • The Getty chose to “transform the subject” by investing in digital cataloging, developing educational programs, building a world-class training facility (for conservation and restoration training).
    • “Put simply, he invested where his resources would make a large and visible difference.”

Chapter 7: Proximate Objectives

  • Proximate objectives: Objectives that are feasible (even if slightly out of reach).

    • Good Example: The Apollo Space Program identified a clear and specific goal (land on the Moon within a decade). The goal, while audacious, was feasible.
    • Bad Example: The War on Drugs lacked a proximate objective. Stopping the use of illegal drugs is not a feasible goal given the current legal and law-enforcement apparatus.
  • Proximate objectives help clarify strategy by providing specifics around which a guiding policy and specific actions can be developed.

  • Proximate objectives cascade down hierarchies and cascade over time.

  • What is proximate for one person or organization may be out of reach of another.

Chapter 8: Chain-Link Systems

  • “A system has a chain-link logic when its performance is limited by its weakest sub-unit…when there is a weak link, a chain is not made stronger by strengthening the other links.”

    • It’s a reminder to focus efforts on the points of failure.
    • Strengthening links that are already sufficient is a waste of time.
  • Limiting factors: Constraints that must be acknowledged and worked around.

    • Example: A house near a noisy highway. No amount of marble in the bathroom or fancy kitchen cabinetry can compensate for the fact that road noise will limit the home’s value.
    • Identify limiting factors that can be fixed rather than those that cannot.
  • Vertically integrated companies are often good at achieving excellence through well-managed chain-link systems:

    • Consider the example of IKEA and Apple.
    • Consider how difficult it is for competitors to replicate these companies.

Chapter 9: Using Design

  • Example: Hannibal Barca and the Battle of Cannae (216 BC).

    • Hannibal raided towns up and down the Italian peninsula in an effort to restore the influence and power of Carthage over the Roman Republic.

    • At Cannae, Hannibal was outnumbered:

      • The Roman Army consisted of 85,000+ troops (8 legions).
      • The Carthaginian Army consisted of 55,000 troops.
    • Each army faced each other in lines measuring roughly one mile long.

    • Hannibal arranged his troops in a broad arc:

      • The center bulged towards the Romans and consisted of troops from Spain and Gaul as well as mercenaries.
      • The flanks consisted of Carthaginian heavy infantry.
      • Carthaginian cavalry were on the sides.
    • The Romans contacted the center bulge first which slowly fell back as planned. Emboldened, the Romans rushed forward.

    • Hannibal let the center retreat to envelop the Romans and then surround them with his heavy infantry on the flanks as well as the mobile cavalry.

  • Three aspects of strategy demonstrated at Cannae:

    • Premeditation: The design of an advance plan.
    • Anticipation: Expectations and guesses about the response of the Romans.
    • Coordination: Hannibal had to coordinate the actions among disparate groups in his army.
  • “Performance is the joint outcome of capability and clever design.”

    • If capabilities are improved, the need for clever design is reduced.
    • If capabilities are limited, the need for clever design is increased.
  • “Resources and tight coordination are partial substitutes for each other.”

  • “To see effective design-type strategy, you must usually look away from the long-successful incumbent toward the company that effectively invades its market space.”

Chapter 10: Focus

  • Example: The case of Crown Cork & Seal, maker of metal containers.

    • Crown’s strategy was developed in the 1960s by John F. Connelly.

    • For 35 years, the company averaged a 19% annual shareholder return.

    • Competitive environment: Industry dominated by three major can companies. Beverage companies used at least two of the big three as suppliers.

    • The big players effectively commodified their product and saw low returns.

    • Crown Cork & Seal provided solutions to smaller firms who needed faster turnarounds and smaller volume of orders.

      • This often meant rush orders and speed which were priced at a premium.
      • This often meant more technical assistance and faster service response which also warranted a price premium.
    • “By concentrating on a carefully selected part of the market, Crown has not only specialized, it has increased its bargaining power with respect to its buyers. Thus, it captures a larger faction of the value it creates.”

      • The majors have large volume businesses but are less profitable (i.e., they capture less value).
      • Crown developed a competitive advantage for its market which made it far more profitable despite being a small, niche player in the industry.
  • “This particular pattern—attacking a segment of the market with a business system supplying more value to that segment than the other players can—is called focus.”

Chapter 11: Growth

  • Example: Author looks at the post-Connelly era of Crown, Cork & Seal in which new CEOs attempted to increase growth and marketshare through acquisitions. The company faltered because the new acquisitions didn’t fit into a coherent strategy with the existing business.
  • “The problem with engineering growth by acquisition is that when you buy a company…you usually pay too much.”
  • “Healthy growth is not engineered. It is the outcome of growing demand for special capabilities or of expanded or extended capabilities. It is the outcome of a firm having superior products and skills. It is the reward for successful innovation, cleverness, efficiency, and creativity.”

Chapter 12: Using Advantage

  • “In real rivalry, there are an uncountable number of asymmetries. It is the leader’s job to identify which asymmetries are critical—which can be turned into important advantages.”

  • Example: Story of a company that developed a new Gore-Tex-like material.

    • The company wanted to go public and build a textile or clothing company.
    • An early investor wanted the company to sell licensing agreements to use the material or an outright sale to a textile manufacturer.
    • Per the investor on switching from developing a new technology to trying to start a successful company: “It’s like this. You have won an Olympic gold medal in the 1500-meter run. You have a good chance at winning the 10,000-meter run and I might back you at that. But you want to switch from running to wrestling gorillas. That’s not a good idea…”
  • Remember: Nobody has an advantage at everything. Just because you succeed in one arena doesn’t mean another one is a logical outgrowth of a competitive advantage.

  • “Press where you have advantages and side-step situations in which you do not. You must exploit your rivals’ weaknesses and avoid leading with your own.”

  • Competitive advantage: Occurs when a business can produce something at a lower cost to competitors and/or if it can deliver more value than competitors for the same price.

    • A competitive advantage is sustainable if competitors cannot easily replicate it.
    • An isolating mechanism is the means of sustaining an advantage. Examples: a monopoly on a resource, a patent, reputation, social, professional and political relationships, network effects, scale effects, tacit knowledge, skill, and expertise.
  • “By providing more value, you avoid being a commodity.”

  • Increasing value can occur in multiple ways:

    • Deepening advantages:

      • Increase the value to buyers.
      • Reducing the production costs.
    • Broadening the extent of advantages:

      • Extend an advantage into new markets and industries.
      • Example: DuPont started with explosives and then moved into manufacturing cellulose, synthetic rubber and paints.
    • Increasing demand for advantaged products/services:

      • Increase the overall number of buyers.
      • Increase the quantity demanded by each buyer.
    • Strengthening the isolating mechanism that block competitors.

      • Patents, copyrights, brand-name protections.

Chapter 13: Using Dynamics

  • Exploit natural asymmetries for advantage.

    • Example: In military strategy, high ground gives an advantage to the defender (it is harder to attack and easier to defend).
  • Two ways to create “high ground” in business:

    1. Innovation. Example: Gore-Tex and FedEx’s overnight delivery system.
    2. Exploit change. These are exogenous events outside the control of the organization. They can, however, be used by an organization to outmaneuver a rival.
  • Most people focus on the immediate effects of environmental or industry changes. Strategic thinkers look at the deeper and less obvious second-order effects.

  • Example: The rise of Cisco Systems:

    • First wave: Rise of the microprocessor and the critical importance of software (faster and less expensive development cycles than hardware).
    • Second wave: The rise of corporate networking.
    • Third wave: IP (Internet Protocol) networking.
    • Fourth wave: The rise of the public internet.
  • Advance signs of industry transition or change:

    • Escalating fixed costs: Results in industry consolidation as only the largest entities can cover large fixed costs.

    • Deregulation: Changes in government rules result in dramatic shifts in industries (examples: aviation, finance, cable television, telecommunications).

    • Predictable biases: People misjudge the peak and decline for specific consumer goods.

      • The faster the uptake of a product, the sooner the market will be saturated.
    • Incumbent responses: Incumbents typically resist change.

    • Attractor states: Embodies a sense of direction about the future evolution of an industry. This state can generate a gravitational pull of its own (example: Cisco’s “IP Everywhere” strategy).

Chapter 14: Inertia and Entropy

  • Inertia, in business, is the unwillingness or inability to adapt to change.

  • Entropy, in business, is the tendency of a system to become more disordered over time. Businesses must be actively managed to minimize entropy.

  • Strategic implications:

    • Successful strategies can be designed to exploit a rivals inherent inertia and inefficiencies.
    • An organization can fail just as easily from internal forces (inertia and entropy) as it can be defeated by external forces.
  • Three types of organizational inertia:

    1. The inertia of routine
    2. Cultural inertia
    3. Inertia by proxy (a situation where a business chooses not to change because it might risk presently valuable revenue streams)
  • Example of entropy in business: General Motors.

    • Alfred Sloan developed a strategy for GM where each automotive brand was targeted at a specific market segment.

      • Working-class people drove Chevrolets.
      • Managers drove Pontiacs.
      • CEOs drove Cadillacs.
    • By the 1980s, Sloan’s product lines and brands became blurred. The same vehicles were sold under multiple model and brand names.

    • “The loss of coherence in General Motors’ product line dramatically increased the amount of internal competition among its brands.”

Chapter 15: Putting it Together

  • Example: Story of Nvidia, the 3D graphics chipmaker.

    • After initial failures, Nvidia devised a focused product strategy: they planned to be a “fabless” chip company that focused on design and outsourced fabrication. Their product would focus on 3D graphics for desktop PCs and embrace the industry standard graphics language (SGI’s GL).

    • Competitors engaged in less focused strategies: a broader set of consumer applications, a mix of 3D, 2D, and multimedia capabilities, proprietary graphics languages, etc.

    • Nvidia built a competitive advantage by devising a 6-month upgrade cycle (rather than the industry standard 18-month).

      • This allowed Nvidia to innovate at a faster rate than the competition.
      • To accomplish this, Nvidia had to align their internal processes and workflow to accommodate the demanding schedule.
    • To satisfy rapid upgrade cycles Nvidia instituted the following:

      • Three separate development teams (each working a standard 18-month cycle). Each team was staggered to achieve 6-month launch intervals.
      • To minimize delays and design errors, Nvidia invested heavily in simulation and emulation solutions.
      • To facilitate device compatibility, Nvidia developed its own proprietary drivers that worked on a wide range of PC configurations (the industry standard in the past was for board makers to create drivers). This move eliminated a key bottleneck in the development path.
    • Nvidia’s strategy was highly coordinated (internally) and competitors like 3dfx and Intel could not keep up in the high-performance 3D market.

Part III: Thinking Like a Strategist
Chapter 16: The Science of Strategy

  • “Good strategy is built on functional knowledge about what works, what doesn’t, and why.”

    • Generally available knowledge: Aka “public knowledge” is information available to everyone.
    • Proprietary knowledge: This is knowledge only available to an individual or company. It is hard won through time, experience, and trial-and-error.
  • Author applies the scientific method (empirical method) to business strategy:

    • Strategy is a hypothesis, an educated judgment.
    • Competition pushes a business to the edge of knowledge. This is one place to seek opportunities to gain advantage over rivals.
    • The value of a hypothesis is drawn from experience, data, and evidence.
  • Anomalies: Are facts that don’t hew to conventional wisdom. Anomalies may present opportunities to learn something valuable and gain a competitive advantage.

    • Example: Howard Schultz, coffee and Starbucks.

      • Schultz observed espresso culture in Italy: regular repeat customers, high price coffee, high unit-sales per location.
      • Schultz determined to bring the Italian espresso experience to America.
      • He tested his formula for the ideal and profitable coffee spot over the course of years.
      • His experiments yielded tremendous proprietary knowledge which he used to transform Starbucks into the powerhouse it is today.
      • Note that Starbucks was (like IKEA and Apple), a vertically integrated company.

Chapter 17: Using Your Head

  • Story of Andrew Carnegie from 1890. At a cocktail party, Carnegie met Frederick Taylor a young organizational analyst. Carnegie told Taylor that if he could tell him something about management that was worth hearing, he would write him a check for $10,000. Taylor told him: “I would advise you to make a list of the ten most important things you can do. And then start doing number one.” Carnegie wrote him a check one week later.

  • “Being strategic largely means being less myopic than your undeliberative self.”

  • Strategy work requires careful deliberation and consideration. Our tendency is the opposite: we often grab onto the first solution we think of and close ourselves to further consideration.

    • Counteract this bias by generating alternative views.
    • Spend more time questioning a solution than justifying it.
    • Don’t accept an early closure to an analysis.
  • Techniques for breaking out of mental ruts:

    • The kernel (see Chapter 5): A diagnosis, guiding policy, and set of coherent actions.
    • Problem-solution: Identify the problems you are trying to overcome and determine a host of possible solutions for them.
    • Create-destroy: Use to develop meaningful alternatives, expend energy on “destroying” the leading alternatives. Pick apart your insights to generate new insights.

Chapter 18: Keeping Your Head

  • “Good strategy grows out of an independent and careful assessment of the situation, harnessing individual insight to carefully crafted purpose. Bad strategy follows the crowd, substituting popular slogans for insights.”

  • Use Michael Porter’s “Five Forces” to analyze an industry. For instance, a terrible industry looks as follows:

    • The product is an undifferentiated commodity.
    • Everyone has the same costs and access to the same technology.
    • The buyers are price sensitive, knowledgeable, and willing to switch suppliers (no loyalty).
  • The 2008 financial meltdown resulted from the following interconnected human errors of judgment:

    • Engineering overreach “where designers built systems whose failure modes and failure consequences exceeded their ability to comprehend or analyze.”
    • Smooth sailing fallacy: People underestimate catastrophic risk and overemphasize past performance.
    • Risk-seeking incentives: These result from government policies where those who profit but bear no risk become risk-seekers. Example: Government bailouts of financial services firms.
    • Social herding: We follow the behaviors of others without questioning the core assumptions that are driving their actions.
    • The inside view: The tendency to ignore relevant data while rationalizing that “this time is different.”

Get weekly email updates and additional content: Sign up for the free Mental Pivot Newsletter.