This article is Part 1 in a 1-Part Series.
- Part 1 - This Article
This post we discuss the various sources of power or advantages in a good strategy.
Table of Content
- Sources of Power
- Using Leverage
- Proximate Objectives
- Chain Link Systems
- Using Design
- Using Advantage
- Using Dynamics
- Inertia and Entropy
A good strategy works by harnessing power and applying it where it will have the greatest effect. A “Good strategy” is an approach that magnifies the effectiveness of actions by finding and using sources of power.
Sources of Power
There are several fundamental sources of power used in good strategies.
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.
- Pivot Points
Anticipation can simply mean considering the habit, preferences ,and policies of others, as well as various inertias and constraints of change.
A pivot point magnifies the effect of effort. It is a natural or created imbalance in a situation, a place where a relatively small adjustment can unleash much larger pent-up forces.
Returns to concentration arise when focusing efforts on fewer, or more limited ,objectives generates larger payoff. These gains flow from combinations of :
Constraints If resources were not limited, there would be no need to select one objective over another. If senior leadership did not have limited cognition, they would gain nothing from concentrating their attention on a few priorities.
Threshold effects 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.
For e.g. there seems to be threshold effects in advertising. 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.
The power of concentration is : Choosing an objective that can be decisively affected by the resources at hand.
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.
Some objectives which are not proximate :
- War on Drugs : No matter how desirable it might be to stop the use of illegal drugs, it is not a proximate objective because it is not feasible within the present legal and law-enforcement framework.
- Energy independence : It is infeasible with the absence of political courage to raise gasoline prices and commit to the development of nuclear power, solar power etc.
An important duty of any leader is to absorb a large part of complexity and ambiguity , passing on to the organization a simpler problem - one that is solvable.
Taking a Strong Position and Creating Options
More dynamic the situation, the poorer your foresight will be. More uncertain and dynamic the situation, the more proximate a strategic objective must be.
The proximate objective is guided by the forecasts of the future, but the more uncertain the future, the more its essential logic is that of “taking and strong position and creating options
Hierarchies of objective
Proximate objectives not only cascade down hierarchies; they cascade in time.
“To concentrate on an objective - to make it a priority - necessarily assumes that many other important things will be take care of.”
Skills can be seen as if they were rungs on a ladder, with higher rungs in reach only when the lower rungs had been attained.
Chain Link Systems
A system has a chain-link logic when its performance is limited by its weakest subunit, or “link”. When there is a weak link, a chain is not made stronger by strengthening the other links.
E.g. For the Space Shuttle Challenger, the weakest link was a solid rubber O-ring. It failed and the rocket exploded.
If a chain must not fail, there is no point in strengthening only some of the links. Similarly, for Challenger, there could be no gain to make the booster engines stronger if the O-ring was weak.
- Quality matters when quantity is an inadequate substitute.
- If you have a special skill or insight at removing limiting factors, then you can be very successful.
There are portions of organizations , and even of economies , that are chain-linked. When each link is managed somewhat separately, the system can get stuck in a low-effectiveness state. The problem arises because of quality matching. 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.
- The first logical problem in chain-link situations is to identify the bottlenecks.
- The second, and greatest, problem is that incremental change may not pay off and may even make things worse.
Chain-link systems can be changed and made excellent. It takes insight into the key bottlenecks. Pus, it takes leadership and the willingness to absorb short-term losses in the quest for future gains.
E.g. IKEA’s system has a chain-link logic.
IKEA teaches us that :
- In building sustained strategic advantage, talented leaders seek to create constellations of activities that are chain-linked. This adds extra effectiveness to the strategy and makes competitive imitation difficult.
- To unstuck a stuck chain-linked system, a strong leader must possess the insight and fortitude the make the necessary investments in each link of the chain.
The concept of strategy has many different facets. There are 3 aspects presented in their purest and most essential form:
- The anticipation of other’s behavior
- Purposeful design of coordinate actions
This essential means planning and designing in advance.
Judgment or anticipation concerning the thoughts/behaviors of others.
Design of Coordinated Action
Doing strategy is more like designing a high performance aircraft than deciding which forklift truck to buy or how large to build a new factory.
The Parts of a Whole
Business and corporate strategy deal with large-scale design-type problems. The greater the challenge, or the higher the performance sought, the more interactions have to be considered.
Performance is the joint outcome of capability and clever design.
The arc of enterprise
- A strong resource position can obviate the need for sophisticated design-type strategy.
- A very powerful resource position produces profit without a great effort, and it is human nature the the easy life breeds laxity. 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.
Overall Good strategy is design, and design is about fitting various pieces together so they work as a coherent whole.
In general, people will not push further because the analysis of unstructured information is hard, time-consuming work that requires both a rich knowledge of facts and well developed skills in logic, deduction, and induction.
If you are serious about strategy work, you must always do your own analysis. 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 mi-stating it, and sometimes they have taken a position as leader without really knowing the reasons for their company’s success.
At the core, strategy is about focus and most complex companies do not focus their resources. Instead they pursue multiple goals at once, not concentrating enough resources to achieve a breakthrough in any of them.
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 firm having superior capabilities . It is the outcome of a firm having superior products and skills. It is the reward for successful innovation, cleverness, efficiency, and creativity. This kind of growth is not just an industry phenomenon. It normally shows up as gain in market share that is simultaneous with a superior rate of profit.
No one has an advantage at everything. Teams, organizations, and even nations have advantages in certain kinds of rivalry under particular conditions.
The secret to using advantage is understanding this particularity. You must press when you have advantage and side-step situations in which you do not. You must exploit your rival’s weaknesses and avoid leading with your own.
Value Creating Changes
Connection between wealth and competitive-advantage is dynamic. Increasing value requires a strategy for progress on at least on of four different fronts:
- Deepening advantages
- Broadening the extent of advantages
- Creating higher demand for advantaged products or services
- Strengthening the isolating mechanisms that block easy replication and imitation by competitors
Deepening an advantage means widening the gap between buyer value and cost by either: * increasing values to buyers * reducing costs * or both
Broadening the extent of advantages
Extending an existing competitive advantage brings into new fields and new competitions. The basis for productive extensions offer reside within complex pools of knowledge and know-how
Creating higher demand
A competitive advantage becomes more valuable when the number of buyers grows and or when the quantity demanded by each buyer increases.
Engineering higher demand for the services of scarce resources is one of the most basic form of business stratagems.
Strengthening Isolating Mechanisms
An isolating mechanism inhibits competitors from duplicating your product or the resources underlying your competitive advantage.
Common approaches to Strengthening isolating mechanisms
- Working on patents, brand-names protections, and copyrights.
- When a new product is developed, its protection may be strengthened by stretching an already powerful brand name to cover it.
- Have a moving target for imitators. In a static setting, rivals will sooner or later figure out how to duplicate much of your proprietary know-how and other specialized resources. However if you alter your methods and products, rivals will have a much harder time with imitation.
One way to gain advantage is to exploit a wave of change. Such waves of changes/trend are largely exogenous - they are mostly beyond the control of any organization.
For e.g. * Jet travel has opened the world to ordinary people * The falling costs of long-distance transport have generated a rising tide of global trade etc.
After a wave of change has passed, it is easy to mark its effects, but by then its too late to take advantage of its surge or to escape its scour. Therefore it is important to perceive and deal with a wave of change in its early stages of development. The challenge is not forecasting but understanding the past and present.
Inertia and Entropy
In Business, inertia is an organization’s unwillingness or inability to adapt to changing circumstances. Even with change programs running at full throttle, it can take many years to alter a large companies basic functioning.
In Science, entropy measures a physical system’s degree of disorder ,and the second law of thermodynamics states that entropy always increases in an isolated physical system.
- Similarly weakly managed organizations tend to become less organized and focused.
- Entropy makes it necessary for leaders to constantly work on maintaining an organization’s purpose, form , and methods even if there are no changes in strategy or competition.
Inertia and entropy have important implications for strategy. Successful strategies often own a great deal the the inertia and inefficiency of rivals.
An organizations greatest challenge may not be external threats or opportunities, but instead the effect of inertia and entropy.
There are 3 types of Inertia
- The Inertia of Routine
- The inertia of culture
- Inertia by Proxy
Inertia of Routine
An organization’s standard routines and methods act to preserve old ways of categorizing and processing information. The inertia caused by standard routines can be revealed by sudden outside shocks:
- a tripling of the price of oil
- the invention of the microprocessor
- telecommunications deregulation etc.
The shock changes the basis of competition in the industry creating a significant gap between the old routines and the needs of the new regime.
Inertia of Culture
The organizational culture inertia can be broken by simplification. This helps to eliminate the complex routines, processes, and hidden bargains among units that mask waste and inefficiency.
Inertia by Proxy
A business may not respond to changes as responding would undermine still-valuable streams of profit. Those streams of profit persist because of the customer’s inertia - a form of inertia by proxy.
Inertia by proxy disappears when the organization decides that adapting to changed circumstances is more important than hanging on to old profit streams.
Entropy is always at work. With the passage of time, great works of art blur and crumble, the original intent fading unless skillful restorers do their work.
The bread and butter of every consultant’s business is undoing entropy - cleaning up the debris and weeds that grow in every organizational garden.
Overall we can say that every building block of a good strategy is :
- intelligent anticipation
- a guiding policy that reduces complexity
- the power of design
- using advantage
- riding a dynamic wave of change
- the important role played by the inertia and entropy of rivals