Business Strategy

● In business, when buying new technology, ask who will get all the value. If the customers could absorb
all of the value, then there is no point in investing in such a technology
● Always ask what giant wave this business is riding - All big companies are built on riding waves
● Market is efficient enough but not perfectly efficient
● Betting on the quality of businesses rather than the brilliance of the managers. There are rare managers
where you can make exceptions
● Bezos’s three principles: (1) thinking on a different timescale, (2) putting the customer first, and (3)
inventing
● Decentralization >>> Centralization (except for things like Capital Allocation)
● Why change management is hard? When they make a change, they see the situation after the change;
everything will be better than it is now. They do not appreciate the losses and changes that people will
experience and that failures will be painful, and they end up compensating the losers because, quite often,
that’s the only way of getting something through. This is why reforms and changes are almost invariably
more expensive than anticipated. To overcome this, take the outside view - look at other attempts at
change
● Incentives and opportunity costs are superpowers. You tell me the incentives; I’ll let you know the
outcomes. Salesforce living only on commissions will be much harder to keep moral than one under less
pressure to earn their living
● The only function of economic forecasting is to make astrology look respectable
● Causes of extreme business success: (1) Extreme maximization or minimization of 1 or 2 variables (e.g.,
Walmart) (2) Adding success factors that lead to a system tipping point (also called escape velocity) in a
parabolic way. Also known as the Lollapalooza effect (3) An extreme performance over many factors
(being above average, but not the best at many things) (4) Catching a big wave
● Bayes theorem:
o Probability estimates should start with what we already know about the world and then be
incrementally updated as new information becomes available.
o Often, we focus on the newest information (availability bias) and ignore the previous information,
but we must continuously update our probability estimates as we get more information
■ Is global warming an illusion, given that there has been no warming trend over the last
decade? The lack of recent warming is weak evidence because there is enough variability
in global temperatures to make such an outcome unsurprising
■ The new information should reduce our confidence in our global warming models—
but only a little.
■ Bayesians try to weigh both the old hypothesis and the new evidence in a sensible way
o Limitations of the Bayesian: It won’t enable you to predict everything! In addition to seeing the
world as an ever-shifting array of probabilities, we must also remember the limitations of
inductive reasoning. A high probability of something being true is not the same as saying it is
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 o Instead of holding on to outdated beliefs by rejecting new information, take in what comes your
way through a system of evaluating probabilities.
The Crux – Ruchard Rumelt
 The concept of a crux narrows attention to a critical issue. It needs to be both very important and
addressable.
 Process doesn't produce strategy; it has a plan. Strategy is an answer to a business problem. It needs a
diagnosis, a response to what's going on here.
 Strategy doesn't require to have goals. There could be numerous goals.
 Diagnosis is the starting point in creating a strategy. Strategy creation is a special form of problem-
solving.
 There are three types of challenges. A choice challenge is when we know the alternatives, but there are
uncertainties and nonquantifiable aspects to choosing. A gnarly design challenge has no given options,
and there are no excellent engineering-type models to test your design against. There is no guarantee of a
solution of any kind. You solve an early challenge by beginning to dig into the nature of the challenge.
What is the paradox or the central knot of the thing? What constraints might be relaxed?
 In competition, look for asymmetries.
 In a situation, start by searching for a central paradox by asking what makes the problem so hard to solve.
Only start working towards the solution once the nature of the core paradox has been established.
 Frameworks like Porter's five forces can help find essential insights but don't help build a strategy.
 What are gnarly situations - There is no clear definition of the problem; you don't have a single goal but a
bundle of ambitions; alternatives may not be given but must be searched for or imagined, and the
connection between potential actions and actual outcomes is unclear.
 The crux is an important part of a mixture of the problem and opportunity that can almost surely be
surmounted if we focus resources and efforts on it.
 How to make a challenge addressable:
o Can it be divided into some problems?
o Is it like any similar problem others have faced?
o Is there anyone who might be an expert? What is changing that might alter its addressability?
o What is a single constraint which, if broken, would make it addressable?
o Can one break its critical yet complex challenge into pieces and start the collection clustering and
filtering process all over again, all focused on just this topic?
 The crux of a challenge is a point of tension where the constraint between resources and issues seems to
chafe.
 The most reliable source of ideas is a reflection on “felt difficulty.” The key source of insights is a clear-
headed diagnosis of the structure of the challenge by using persistence, analogy, point of view, making
explicit assumptions, asking why, and recognizing your unconscious constraints.
 The most direct source of insights are analogies, the examples and lessons of others. Explicit examples
from direct competitors are the clearest but also a risk. Many of the most valuable analogies are taken
from other industries, countries, or other types. Or they can come from different situations entirely. Avast
knowledge and experience are beneficial in tapping into analogies.
 Mark Benioff started Salesforce.com as a direct analogy to Amazon. Howard Schultz started Starbucks
after observing a coffee shop in Milan. Ryanair used Southwest Airlines. Facebook started as an online
analogy to a college yearbook.

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 Make assumptions explicit. Ask why about your premises. This will help you break the existing frame. A
significant impediment to insight is an unconscious constraint. An unrecognized constraint is a belief
about the world.
 Avoid competing head-on. Ryan Air serviced nonmajor airports on at least one side of the trip. Focus on
where you can win.
 You solve by relaxing the constraint. When the conditions are so strong, no solution is possible; strategy
is impossible. There is no solution without risking relaxing at least one of the constraints.
 Strategies are usually corner solutions. When there are many conflicting desires and conflicting theories
about how they can be met, the consequences are indecision. The central challenge is not the outside
world but the organization's contradictory mix of values and purpose. After Apple's iPhone appeared,
competing ambition and constraints were an issue at Microsoft. At that moment, Microsoft's top
management needed to modernize its Windows-based mobile phone software. It was also facing a search
engine challenge from Google. However, the more profound challenge was a politicized internal culture
combined with low skill at integrating newly acquired talent.
 Large organizations cannot make OODA loops fast. Why startups beat the large companies - OODA
loops.
 When acquiring, companies acquire skills and technologies complementary to existing strategy. Do small
acquisitions. Don't overpay. By private companies. Pay cash.
 Don't fake earnings. Don't do earning smoothening, like United Health Group.
 You have to have a deep, narrow focus. Coherent actions that support one another. Actions and policies
that do not contradict each other. For example, at Amazon, everything is aligned for customers. There's
nothing magical about coherence. It looks like common sense. Do not have inconsistent goals.
 Cost of coherence is saying no to many interests. Compromising doesn't lead to good strategy.
 Diagnosis. To solve a problem, you have to understand it first. What are the key drivers and root causes?
Why is it difficult to solve?
 The real problems are complex, but we simplify by making assumptions. Diagnosis is what and why. The
most powerful tool for diagnosis is reframing the situation. Frame is a way to look at a problem. One of
the garment tools of diagnosis is an analogy. The trick is to use analogy well. Make sure that the logic
maps to the current situation. If you make a terrible analogy, you'll get the wrong answer. This is why the
industry ignored iPhones because they thought the phones were like PCs. Different people have different
frames for your problem.
 Another diagnosis tool is comparing to your competitors or your past.
 Porter's five forces are about the industry and performance, not the individual company. Industry
profitability doesn't mean anything. There are anomalies in every sector. There is always a huge variation.
 Clayton Christiansen's disruption theory is not entirely accurate. For example, the iPhone could
outcompete BlackBerry even though it was a more expensive product. A business can be attacked with a
better and more expensive product. A new ecosystem like Kodak could disrupt you.
 How to deal with disruption? The real challenge of disruption is not what you don't see. The real
challenges are that it costs more profit to respond than it seems to be worth, your organization lacks skills
or financial strength or organizational skill to react, and the destruction of the whole ecosystems in which
you live.
 If you don't face any of these sharp challenges, then you don't have a disruption problem where a new
technology could hurt a current profit below the cost, and the benefits of weighting should be assessed. If

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 your company is not diversified, it might be best to sell the business to a company that is. Letting the
business decline and then acting later is another option. That is what most telephone companies did when
the Internet threatened to disrupt their business
o if you like the technical skills to respond, you can acquire a company that does have the skills.
There was no decent smart company for BlackBerry to acquire. When the whole ecosystem
collapses, you cannot do much unless you have a crystal ball. There's no magical trip to make a
business immortal.
 Four sources of edge
o Information - knowing something that others don't.
o Having the scale that others don't
o Having a reputation on her brand
o Be the most cost-effective
 To have a key differentiated advantage, you must know the details.
 Close coupling - instead of doing one thing well, do things well together. That way, the advantage will
compound. Bring together ideas that are not have not been combined yet. As Scott Adams says.
 Strategy is a bet.
 Uncoupling - is the opposite of integration.
 Scale and experience - you must know at what point scales and experience do not have incremental
returns. So, it doesn't have infinite power. The scale does not mean economies of scale. That's why most
mergers fail. Experience does matter when executing complex activities.
 You can only predict five to seven years out. Beyond that, no one knows.
 Don't start with goals, as goals are arbitrary. A good goal is the result of an effective strategy. It is not the
starting point of the strategy strategy; it is a decision about where and with whom it will compete. There
is no way to work backward from broad goals to strategy. The plan may act in the service of desires, but it
is shaped by insights about what has changed, skills and knowledge that are both protected and special,
skills and resources of other competitors, and what resources can be used.
 Goals is a decision. If the goal is proclaimed without a diagnosis of the forces at work, then by itself, it is
a decision about what is important. Starting with supporting goals like gaining market share lacks
entrepreneurial insight.
 What is a good goal? It resolves ambiguity, is something everyone understands and knows how to
achieve, represents a clear set of choices with a narrow focus, and does not always agree on.
 Bad goals are a collection of short-term measures that fail to address the critical underlying issue.
 How to succeed requires a strategy and good execution. Both are important. Don't confuse current
financial results with strategy.
 Long-range planning can be helpful if the company has the grit to invest today for events of this timing
and importance.
 Mission statements are bullshit. Vision is set in a vacuum. Mission statements change over time.
 Plans can't predict competitive outcomes.
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