Rumelt

RICHARD RUMELT – GOOD STRATEGY, BAD STRATEGY

“Nelson’s challenge was that he was outnumbered. His strategy was to risk his lead ships in order to break the coherence of his enemy’s fleet. With coherence lost, he judged, the more experienced English captains would come out on top in the ensuing melee. Good strategy almost always looks this simple and obvious and does not take a thick deck of PowerPoint slides to explain.

Instead, a talented leader identifies the one or two critical issues in the situation—the pivot points that can multiply the effectiveness of effort—and then focuses and concentrates action and resources on them.

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.

A leader’s most important responsibility is identifying the biggest challenges to forward progress and devising a coherent approach to overcoming them. In contexts ranging from corporate direction to national security, strategy matters. Yet we have become so accustomed to strategy as exhortation that we hardly blink an eye when a leader spouts slogans and announces high-sounding goals, calling the mixture a “strategy.

A good strategy recognizes the nature of the challenge and offers a way of surmounting it. Simply being ambitious is not a strategy.

A good strategy does more than urge us forward toward a goal or vision. A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them. And the greater the challenge, the more a good strategy focuses and coordinates efforts to achieve a powerful competitive punch or problem-solving effect.

More and more organizational leaders say they have a strategy, but they do not. Instead, they espouse what I call bad strategy. Bad strategy tends to skip over pesky details such as problems. It ignores the power of choice and focus, trying instead to accommodate a multitude of conflicting demands and interests.

... strategy, responsive to innovation and ambition, selects the path, identifying how, why, and where leadership and determination are to be applied.

... the term “strategy” should mean a cohesive response to an important challenge.

Many people assume that a strategy is a big-picture overall direction, divorced from any specific action. But defining strategy as broad concepts, thereby leaving out action, creates a wide chasm between “strategy” and “implementation.” If you accept this chasm, most strategy work becomes wheel spinning.

A good strategy includes a set of coherent actions. They are not “implementation” details; they are the punch in the strategy. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.

Executives who complain about “execution” problems have usually confused strategy with goal setting. When the “strategy” process is basically a game of setting performance goals—so much market share and so much profit, so many students graduating high school, so many visitors to the museum—then there remains a yawning gap between these ambitions and action. Strategy is about how an organization will move forward. Doing strategy is figuring out how to advance the organization’s interests.

A good strategy has an essential logical structure that I call the kernel. The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action.

Bad strategy is more than just the absence of good strategy. Bad strategy has a life and logic of its own, a false edifice built on mistaken foundations. Bad strategy may actively avoid analyzing obstacles because a leader believes that negative thoughts get in the way. Leaders may create bad strategy by mistakenly treating strategy work as an exercise in goal setting rather than problem solving. Or they may avoid hard choices because they do not wish to offend anyone—generating a bad strategy that tries to cover all the bases rather than focus resources and actions.

Yet this whole midlevel framework misses two huge, incredibly important natural sources of

strength:

1. Having a coherent strategy—one that coordinates policies and actions. A good strategy doesn’t just draw on existing strength; it creates strength through the coherence of its design. Most organizations of any size don’t do this. Rather, they pursue multiple objectives that are unconnected with one another or, worse, that conflict with one another.

1. The creation of new strengths through subtle shifts in viewpoint. An insightful reframing of a competitive situation can create whole new patterns of advantage and weakness.

The best answer to this puzzle is that the real surprise was that such a pure and focused strategy was actually implemented. Most complex organizations spread rather than concentrate resources, acting to placate and pay off internal and external interests. Thus, we are surprised when a complex organization, such as Apple or the U.S. Army, actually focuses its actions. Not because of secrecy, but because good strategy itself is unexpected.

Having conflicting goals, dedicating resources to unconnected targets, and accommodating incompatible interests are the luxuries of the rich and powerful, but they make for bad strategy.

(Rumelt, ‘Good Strategy / Bad Strategy’, p.20)

How someone can see what others have not, or what they have ignored, and thereby discover a pivotal objective and create an advantage, lies at the very edge of our understanding, something glimpsed only out of the corner of our minds. Not every good strategy draws on this kind of insight, but those that do generate the extra kick that separates “ordinary excellence” from the extraordinary.

Looking just at the actions of a winning firm, you see only part of the picture. Whenever an organization succeeds greatly, there is also, at the same time, either blocked or failed competition.

It isn’t the store; it is the network of 150 stores. And the data flows and the management flows and a distribution hub. The network replaced the store. A regional network of 150 stores serves a population of millions! Walton didn’t break the conventional wisdom; he broke the old definition of a store. If no one gets it right away, I drop hints until they do.

Andy Marshall and I were both interested in how the process of planning shapes strategic outcomes.

Behind almost all of these forces and events lay the indirect competitive logic that Marshall and Roche expressed in 1976: use your relative advantages to impose out-of-proportion costs on the opposition and complicate his problem of competing with you.

Bad strategy is not simply the absence of good strategy. It grows out of specific misconceptions and leadership dysfunctions. Once you develop the ability to detect bad strategy, you will dramatically improve your effectiveness at judging, influencing, and creating strategy. To detect a bad strategy, look for one or more of its four major hallmarks:

• Fluff. Fluff is a form of gibberish masquerading as strategic concepts or arguments. It uses “Sunday” words (words that are inflated and unnecessarily abstruse) and apparently esoteric concepts to create the illusion of high-level thinking.

• Failure to face the challenge. Bad strategy fails to recognize or define the challenge. When you cannot define the challenge, you cannot evaluate a strategy or improve it.

• Mistaking goals for strategy. Many bad strategies are just statements of desire rather than plans for overcoming obstacles.

• 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.

The articulation of a national vision that describes America’s purpose in the post–September 11th world is useful—indeed, it is vital—but describing a destination is no substitute for developing a comprehensive roadmap for how the country will achieve its stated goals.

It contended, “All too much of what is put forward as strategy is not. The basic problem is confusion between strategy and strategic goals.

Reading the documents referenced, I had to agree. They presented a plethora of broad goals and affirmations of values such as democracy and economic well-being. But there was little guidance as to how to actually deal with the national security situation.

Bad strategy, I explained, is not the same thing as no strategy or strategy that fails rather than succeeds. Rather, it is an identifiable way of thinking and writing about strategy that has, unfortunately, been gaining ground. 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 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.

A strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge. If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy. And if you cannot assess a strategy’s quality, you cannot reject a bad strategy or improve a good one.

The strategic plan did not lack for texture and detail. Looking within the agricultural equipment group, for example, there is information and discussion about each segment.

If you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have either a stretch goal, a budget, or a list of things you wish would happen.

Like Harvester’s, they do not identify and come to grips with the fundamental obstacles and problems that stand in the organization’s way. Looking at most of this product, or listening to the managers who have produced it, you will find an almost total lack of strategic thinking. Instead, you will find high-sounding sentiments together with plans to spend more and somehow “get better.

DARPA’s surprising strategy has a shape and structure common to all good strategy. It follows from a careful definition of the challenge. It anticipates the real-world difficulties to be overcome. It eschews fluff. It creates policies that concentrate resources and actions on surmounting those difficulties.

Strategic objectives should address a specific process or accomplishment, such as halving the time it takes to respond to a customer, or getting work from several Fortune 500 corporations.

Motivation is an essential part of life and success, and a leader may justly ask for “one last push,” but the leader’s job is more than that. The job of the leader is also to create the conditions that will make that push effective, to have a strategy worthy of the effort called upon.

If you continue down the road you are on you will be counting on motivation to move the company forward. I cannot honestly recommend that as a way forward because business competition is not just a battle of strength and wills; it is also a competition over insights and competencies. My judgment is that motivation, by itself, will not give this company enough of an edge to achieve your goals.

To obtain higher performance, leaders must identify the critical obstacles to forward progress and then develop a coherent approach to overcoming them.

The need for true strategy work is episodic, not necessarily annual.

A leader’s most important job is creating and constantly adjusting this strategic bridge between goals and objectives.

Good strategy works by focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes.

A long list of ‘things to do,’ often mislabelled as ‘strategies’ or ‘objectives,’ is not a strategy. It is just a list of things to do. Such lists usually grow out of planning meetings in which a wide variety of stakeholders make suggestions as to things they would like to see done. Rather than focus on a few important items, the group sweeps the whole day’s collection into the ‘strategic plan.

The second form of bad strategic objectives is one that is “blue sky.” A good strategy defines a critical challenge. What is more, it builds a bridge between that challenge and action, between desire and immediate objectives that lie within grasp. Thus, the objectives a good strategy sets should stand a good chance of being accomplished, given existing resources and competence… By contrast, a blue-sky objective is usually a simple restatement of the desired state of affairs or of the challenge. It skips over the annoying fact that no one has a clue as to how to get there.

Unless leadership offers a theory of why things haven’t worked in the past, or why the challenge is difficult, it is hard to generate good strategy.

... bad strategy is vacuous and superficial, has internal contradictions, and doesn’t define or address the problem. Bad strategy generates a feeling of dull annoyance when you have to listen to it or read it.

CHAPTER 4: WHY SO MUCH BAD STRATEGY?

“Bad strategy flourishes because it floats above analysis, logic, and choice, held aloft by the hot hope that one can avoid dealing with these tricky fundamentals and the difficulties of mastering them.

Not miscalculation, bad strategy is the active avoidance of the hard work of crafting a good strategy. One common reason for choosing avoidance is the pain or difficulty of choice. When leaders are unwilling or unable to make choices among competing values and parties, bad strategy is the consequence. A second pathway to bad strategy is the siren song of template-style strategy—filling in the blanks with vision, mission, values, and strategies. This path offers a one-size-fits-all substitute for the hard work of analysis and coordinated action. A third pathway to bad strategy is New Thought—the belief that all you need to succeed is a positive mental attitude.

Strategy involves focus and, therefore, choice. And choice means setting aside some goals in favor of others.

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. There is difficult psychological, political, and organizational work in saying “no” to whole worlds of hopes, dreams, and aspirations.

Any coherent strategy pushes resources toward some ends and away from others. These are the inevitable consequences of scarcity and change. Yet this channeling of resources away from traditional uses is fraught with pain and difficulty.

Strategies focus resources, energy, and attention on some objectives rather than others. 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. This is the fate of many strategy initiatives in large organizations. There may be talk about focusing on this or pushing on that, but at the end of the day no one wants to change what they are doing very much. When organizations are unable to make new strategies—when people evade the work of choosing among different paths into the future—then you get vague mom-and-apple-pie goals that everyone can agree on. Such goals are direct evidence of leadership’s insufficient will or political power to make or enforce hard choices. Put differently, universal buy-in usually signals the absence of choice.

The general outline goes like this: the transformational leader (1) develops or has a vision, (2) inspires people to sacrifice (change) for the good of the organization, and (3) empowers

people to accomplish the vision. Some experts place more emphasis on the moral qualities of the leader, others on commitment, and others on the leader being intellectually stimulating.

Leadership inspires and motivates self-sacrifice. Change, for example, requires painful adjustments, and good leadership helps people feel more positively about making those adjustments. Strategy is the craft of figuring out which purposes are both worth pursuing and capable of being accomplished.

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.

All analysis starts with the consideration of what may happen, including unwelcome events.

The kernel of a strategy contains three elements:

1. A diagnosis that defines or explains the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical.

1. A guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis.

1. A set of coherent actions that are designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the guiding policy.

The first step toward effective strategy is diagnosing the specific structure of the challenge rather than simply naming performance goals. The second step is choosing an overall guiding policy for dealing with the situation that builds on or creates some type of leverage or advantage. The third step is the design of a configuration of actions and resource allocations that implement the chosen guiding policy.

In many large organizations, the challenge is often diagnosed as internal. That is, the organization’s competitive problems may be much lighter than the obstacles imposed by its own outdated routines, bureaucracy, pools of entrenched interests, lack of cooperation across units, and plain-old bad management. Thus, the guiding policy lies in the realm of reorganization and renewal. And the set of coherent actions are changes in people, power, and procedures. In other cases the challenge may be building or deepening competitive advantage by pushing the frontiers of organizational capability.

The core content of a strategy is a diagnosis of the situation at hand, the creation or identification of a guiding policy for dealing with the critical difficulties, and a set of coherent actions.

A great deal of strategy work is trying to figure out what is going on. Not just deciding what to do, but the more fundamental problem of comprehending the situation.

The diagnosis for the situation should replace the overwhelming complexity of reality with a simpler story, a story that calls attention to its crucial aspects. This simplified model of reality allows one to make sense of the situation and engage in further problem solving.

Furthermore, a good strategic diagnosis does more than explain a situation—it also defines a domain of action.

In business, most deep strategic changes are brought about by a change in diagnosis—a change in the definition of the company’s situation.

Good guiding policies are not goals or visions or images of desirable end states. Rather, they define a method of grappling with the situation and ruling out a vast array of possible actions.

You may correctly observe that many other people use the term “strategy” for what I am calling the “guiding policy.” I have found that defining a strategy as just a broad guiding policy is a mistake. Without a diagnosis, one cannot evaluate alternative guiding policies. Without working through to at least the first round of action one cannot be sure that the guiding policy can be implemented. Good strategy is not just “what” you are trying to do. It is also “why” and “how” you are doing it.

A good guiding policy tackles the obstacles identified in the diagnosis by creating or drawing upon sources of advantage. Indeed, the heart of the matter in strategy is usually advantage.

An economist would tell her that she should take actions that maximize profit, a technically correct but useless piece of advice. In the economics textbook it is simple: choose the rate of output Q that provides the biggest gap between revenue and cost. In the real world, however, “maximize profit” is not a helpful prescription, because the challenge of making, or maximizing, profit is an ill-structured problem.

Many people call the guiding policy “the strategy” and stop there. This is a mistake. Strategy is about action, about doing something. The kernel of a strategy must contain action. It does not need to point to all the actions that will be taken as events unfold, but there must be enough clarity about action to bring concepts down to earth. To have punch, actions should coordinate and build upon one another, focusing organizational energy.

Here, as in so many situations, the required actions were not mysterious. The impediment was the hope that the pain of those actions could, somehow, be avoided. Indeed, we always hope that a brilliant insight or very clever design will allow us to accomplish several apparently conflicting objectives with a single stroke, and occasionally we are vouchsafed this kind of deliverance.

Coherence

The actions within the kernel of strategy should be coherent. That is, the resource deployments, policies, and maneuvers that are undertaken should be consistent and coordinated.

A strategy coordinates action to address a specific challenge.

The idea that coordination, by itself, can be a source of advantage is a very deep principle. It is often underappreciated because people tend to think of coordination in terms of continuing mutual adjustments among agents. Strategic coordination, or coherence, is not ad hoc mutual adjustment. It is coherence imposed on a system by policy and design. More specifically, design is the engineering of fit among parts, specifying how actions and resources will be combined.

Strategy is visible as coordinated action imposed on a system. When I say strategy is “imposed,” I mean just that. It is an exercise in centralized power, used to overcome the natural workings of a system. This coordination is unnatural in the sense that it would not occur without the hand of strategy.

Thus, we should seek coordinated policies only when the gains are very large. There will be costs to demanding coordination, because it will ride roughshod over economies of specialization and more nuanced local responses. The brilliance of good organization is not in making sure that everything is connected to everything else. Down that road lies a frozen

maladaptive stasis. Good strategy and good organization lie in specializing on the right activities and imposing only the essential amount of coordination.

In very general terms, a good strategy works by harnessing power and applying it where it will have the greatest effect.

In general, 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 does not require psychic powers. In many circumstances, anticipation simply means considering the habits, preferences, and policies of others, as well as various inertias and constraints on change.

Murata’s strategy focused organizational energy on decisive aspects of the situation. It was not a profit plan or a set of financial goals. It was an entrepreneurial insight into the situation that had the potential to actually create and extend advantage.

In either case, the strategist can increase the perceived effectiveness of action by focusing effort on targets that will catch attention and sway opinion.

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. A proximate objective names a target that the organization can reasonably be expected to hit, even overwhelm.

... every organization faces a situation where the full complexity and ambiguity of the situation is daunting. 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.

The more dynamic the situation, the poorer your foresight will be. Therefore, the more uncertain and dynamic the situation, the more proximate a strategic objective must be. The proximate objective is guided by forecasts of the future, but the more uncertain the future, the more its essential logic is that of “taking a strong position and creating options,” not of looking far ahead.

Then I asked the group to imagine that they were allowed to have only one objective. And the objective had to be feasible. What one single feasible objective, when accomplished, would make the biggest difference?

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.

As an investor, one wants to find limiting factors that can be fixed, such as paint, rather than

factors that cannot be fixed, such as highway noise. If you have a special skill or insight at removing limiting factors, then you can be very successful.

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.

To make matters even more difficult, striving for higher quality in just one of the linked units may make matters worse! Higher quality in a unit requires investments in better resources and more expensive inputs, including people. Since these efforts to improve just one linked unit will not improve the overall performance of the chain-linked system, the system’s overall profit actually declines. Thus, the incentive to improve each unit is dulled.

If one has not internalized the concept of quality matching and the problems of change in chain-link systems, then Marco’s explanation of his actions may seem banal—he identified the three problems and worked on them in turn. But if one has these concepts, then Marco’s statement is dense with meaning.

The first logical problem in chain-link situations is to identify the bottlenecks, and Marco did that—quality, sales’ technical competence, and cost. The second, and greatest, problem is that incremental change may not pay off and may even make things worse. That is why systems get stuck. Marco’s solution to this problem was to take personal responsibility for the final result and direct others’ attention to the three bottlenecks, one after another…

… Marco avoided this problem by shutting down the normal system of local measurement and reward, refocusing on change itself as the objective…

Instead, Marco described a turnaround in which he provided the overall definition of what had to be done and in which he anticipated and absorbed the costs of change. In any organization there is always a managed tension between the need for decentralized autonomous action and the need for centralized direction and coordination. To produce a turnaround of a chain-link system, Marco Tinelli tipped the balance, at least for a while, strongly toward central direction and coordination.

Because IKEA’s many policies are different from the norm and because they fit together in a coherent design, IKEA’s system has a chain-link logic. That means that adopting only one of these policies does no good—it adds expense to the competitor’s business without providing any real competition to IKEA.

For IKEA’s set of policies to be a source of sustained competitive excellence, three conditions must hold:

• IKEA must perform each of its core activities with outstanding efficiency and effectiveness.

• These core activities must be sufficiently chain-linked that a rival cannot grab business away from IKEA by adopting only one of them and performing it well…

• The chain-linked activities should form an unusual grouping such that expertise in one does not easily carry over to expertise at the others. Thus, a traditional furniture retailer that did add a catalog would still have to master design and logistics and build vastly larger stores to begin to compete with IKEA.

IKEA teaches us that in building sustained strategic advantage, talented leaders seek to create constellations of activities that are chain-linked.

However, what we do see in the story of Cannae are three aspects of strategy in bold relief, presented in their purest and most essential forms—premeditation, the anticipation of others’ behavior, and the purposeful design of coordinated actions.

Anticipation

A fundamental ingredient in a strategy is a judgment or anticipation concerning the thoughts and/or behavior of others.

It is often said that a strategy is a choice or a decision. The words “choice” and “decision” evoke an image of someone considering a list of alternatives and then selecting one of them.

In the case at hand, Hannibal was certainly not briefed by a staff presenting four options arranged on a PowerPoint slide. Rather, he faced a challenge and he designed a novel response. Today, as then, many effective strategies are more designs than decisions—are more constructed than chosen… When someone says “Managers are decision makers,” they are not talking about master strategists, for a master strategist is a designer.

Another firm may more easily meet her demands, so a critical issue becomes the identification of the particular set of buyers—our target market—where we have a differential advantage. Competitive strategy is still design, but there are now more parameters—more interactions—to worry about. The new interactions are the offerings and strategies of rivals. Very quickly, you are going to focus on what you, or your company, can do more effectively than others. It will normally turn out that competition makes you focus on a much smaller subset of car models, manufacturing setups, and customers.

I am describing a strategy as a design rather than as a plan or as a choice because I want to emphasize the issue of mutual adjustment. In design problems, where various elements must be arranged, adjusted, and coordinated, there can be sharply peaked gains to getting combinations right and sharp costs to getting them wrong. A good strategy coordinates policies across activities to focus the competitive punch.

The lesson I took from systems engineering at JPL was that performance is the joint outcome of capability and clever design.

A design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation. Given a set bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions. Given a set level of challenge, higher-quality resources lessen the need for the tight integration of resources and actions.

A more tightly integrated design is harder to create, narrower in focus, more fragile in use, and less flexible in responding to change. A Formula 1 racing car, for example, is a tightly integrated design and is faster around the track than a Subaru Forester, but the less tightly integrated Forester is useful for a much wider range of purposes. Nevertheless, when the competitive challenge is very high, it may be necessary to accept these costs and design a tightly integrated response. With less challenge, it is normally better to have a bit less specialization and integration so that a broader market can be addressed.

A strategic resource is a kind of property that is fairly long lasting that has been constructed, developed over time, designed, or discovered by a company and that competitors cannot duplicate without suffering a net economic loss.

... a strong resource position can obviate the need for sophisticated design-type strategy. If, instead, there is only a moderate resource position—perhaps a new product idea or a customer relationship—the challenge is to build a sensible and coherent strategy around that resource. Finally, the cleverest strategies, the ones we study down through the years, begin with very few strategic resources, obtaining their results through the adroit coordination of actions in time and across functions.

A very powerful resource position produces profit without great effort, and it is human nature that 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.

It is not easy to hold this kind of quality leadership for three big reasons. First, no one will believe you have the longest-lasting trucks until they have already lasted a long time on the road. It’s a reputation that takes a while to earn and can be lost quickly. Second, designing a very high-quality piece of machinery is not a textbook problem. Designers learn from other designers over time, and the company accumulates these nuggets of wisdom by providing a good, stable place to work for talented engineers. Third, it is usually quite difficult to convince buyers to pay an up-front premium for future savings, even if the numbers are clear. People tend to be more myopic than economic theory would suggest.

Good strategy is design, and design is about fitting various pieces together so they work as a coherent whole.

But good strategy looks past these issues to what is fundamental. From that perspective, the threats to the company are not specific new products or competitive moves, but changes that undermine the logic of its design.

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 we are not going to automatically accept the opinions of others, how can we independently identify a company’s strategy? We do this by looking at each policy of the company and noticing those that are different from the norm in the industry. We then try to figure out the common target of such distinctive policies—what they are coordinated on accomplishing.

Crown and the majors are in the same industry but are playing by different rules. 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 fraction of the value it creates. The majors, by contrast, have larger volumes of business but capture much lower fractions of the value they create. Thus, Crown crafted a competitive advantage in its target market. It isn’t the biggest can maker, but it makes the most money.

”If the business is really successful, then there is usually a good strategic logic behind that success, be it hidden or not. But the truth is that many companies, especially large complex companies, don’t really have strategies. At the core, strategy is about focus, and most complex organizations don’t focus their resources. Instead, they pursue multiple goals at once, not concentrating enough resources to achieve a breakthrough in any of them.

Avery had predicted that its size would allow it to get better prices from suppliers and that Crown’s traditional skill at cost control would let it trim excess overhead and capacity from French-run CarnaudMetalBox. No one mentioned the awkward fact that Crown’s traditional competence had been flexibility and short runs, not cost control.

Growth based upon substitution has a clear ceiling and, once the conversion to the substitute has taken place, the growth grinds to a sudden halt.

All of this—the slowdown of growth, the industry overcapacity, and the spillover of price competition from plastic back to metal cans—is basic industry analysis and could have been easily predicted by the use of the popular Five Forces framework developed by Michael Porter.

Between 1998 and 2001, Crown’s stock price dropped catastrophically, falling from $55 to $5.

He did not choose to understand the deeper meaning of focus—a concentration and coordination of action and resources that creates an advantage.

The proposition that growth itself creates value is so deeply entrenched in the rhetoric of business that it has become an article of almost unquestioned faith that growth is a good thing.

But unless you can buy companies for less than they are worth, or unless you are specially positioned to add more value to the target than anyone else can, no value is created by such expansion.

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. This kind of growth is not just an industry phenomenon. It normally shows up as a gain in market share that is simultaneous with a superior rate of profit.

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.

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 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.

The basic definition of competitive advantage is straightforward. If your business can produce at a lower cost than can competitors, or if it can deliver more perceived value than can competitors, or a mix of the two, then you have a competitive advantage.

Claims in advertising or sales pitches that a particular IT system or product or training program will provide a competitive advantage are misusing the term since an “advantage” on sale to all comers is a contradiction in terms.

It is one of the big benefits of being a private company. When I first bought these lands from major oil companies, they were looking ahead one quarter or one year. They wanted to get the assets ‘off their books’ to make their financial ratios look better. We can do more with these businesses because we don’t suffer the crazy pressures that are put on a public company.

But it was Stewart Resnick who helped me see another even more important fact about the silver machine—that its advantage, though real, wasn’t interesting.

The silver machine’s advantage gives it value, but the advantage isn’t interesting because there is no way for an owner to engineer an increase in its value. The machine cannot be made more efficient.

For Stewart Resnick, and now for me, a competitive advantage is interesting when one has insights into ways to increase its value. That means there must be things you can do, on your own, to increase its value.

In particular, increasing value requires a strategy for progress on at least one of four different fronts:

• deepening advantages,

• broadening the extent of advantages,

• creating higher demand for advantaged products or services, or

• strengthening the isolating mechanisms that block easy replication and imitation by competitors.

Deepening Advantage

Start by defining advantage in terms of surplus—the gap between buyer value and cost. Deepening an advantage means widening this gap by either increasing value to buyers, reducing costs, or both…

Gilbreth’s lesson, still fresh today, is that incentives alone are not enough. One must reexamine each aspect of product and process, casting aside the comfortable assumption that everyone knows what they are doing…

Companies that excel at product development and improvement carefully study the attitudes, decisions, and feelings of buyers. They develop a special empathy for customers and anticipate problems before they occur…

Broadening the Extent of Advantage

Extending an existing competitive advantage brings it into new fields and new competitions…

Extending a competitive advantage requires looking away from products, buyers, and competitors and looking instead at the special skills and resources that underlie a competitive advantage. In other words, “Build on your strengths.”...

The basis for productive extensions often resides 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 actually the most basic of business stratagems…

Strengthening Isolation Mechanisms

An isolating mechanism inhibits competitors from duplicating your product or the resources underlying your competitive advantage. If you can create new isolating mechanisms, or strengthen existing ones, you can increase the value of the business…

When an isolating mechanism is based on the collective know-how of groups, it may be strengthened by reducing turnover.

One way to find fresh undefended high ground is by creating it yourself through pure innovation. Dramatic technical inventions, such as Gore-Tex, or business model innovations, such as FedEx’s overnight delivery system, create new high ground that may last for years before competitors appear at the ramparts.

The other way to grab the high ground—the way that is my focus here— is to exploit a wave of change. Such waves of change are largely exogenous—they are mostly beyond the control of any one organization.

An exogenous wave of change is like the wind in a racing boat’s sails. It provides raw, sometimes turbulent, power. A leader’s job is to provide the insight, skill, and inventiveness that can harness that power to a purpose.

Historical perspective helps you make judgments about importance and significance.

Discerning the Fundamentals

The work of discerning whether there are important changes afoot involves getting into the gritty details. To make good bets on how a wave of change will play out you must acquire enough expertise to question the experts…Leaders who stay “above the details” may do well in stable times, but riding a wave of change requires an intimate feel for its origins and dynamics.

As is often the case, restating a general question in specific terms helped. We quickly developed an answer that has since stood up to scrutiny by a number of other technical groups: Good hardware and software engineers are both expensive. The big difference lies in the cost of prototyping, upgrading, and, especially, the cost of fixing a mistake. Design always involves a certain amount of trial and error, and hardware trials and errors are much more costly. If a hardware design doesn’t work correctly, it can mean months of expensive redesign. If software doesn’t work, a software engineer fixes the problem by typing new instructions into a file, recompiling, and trying again in a few minutes or a few days. And software can be quickly fixed and upgraded even after the product has shipped.

Some Guideposts

It is hard to show your skill as a sailor when there is no wind. Similarly, it is in moments of industry transition that skills at strategy are most valuable. During the relatively stable periods between episodic transitions, it is difficult for followers to catch the leader, just as it is difficult for one of the two or three leaders to pull far ahead of the others. But in moments of

transition, the old pecking order of competitors may be upset and a new order becomes possible.

There is no simple theory or framework for analyzing waves of change…

Fortunately, a leader does not need to get it totally right—the organization’s strategy merely has to be more right than those of its rivals. If you can peer into the fog of change and see 10 percent more clearly than others see, then you may gain an edge…

… I use a number of mental guideposts. Each guidepost is an observation or way of thinking that seems to warrant attention.

The first guidepost demarks an industry transition induced by escalating fixed costs. The second calls out a transition created by deregulation. The third highlights predictable biases in forecasting. A fourth marks the need to properly assess incumbent response to change. And the fifth guidepost is the concept of an attractor state.

Guidepost 1 - Rising Fixed Costs

The simplest form of transition is triggered by substantial increases in fixed costs, especially product development costs. This increase may force the industry to consolidate because only the largest competitors can cover these fixed charges…

Guidepost 2 - Deregulation

Many major transitions are triggered by major changes in government policy, especially deregulation…

… the newly deregulated players chased what used to be the more profitable segments long after the differential vanished. This happened because of the inertia in corporate routines and mental maps of the terrain, and because of poor cost data. In fact, highly regulated companies do not know their own costs—they will have developed complex systems to justify their costs and prices, systems that hide their real costs even from themselves…

Guidepost 3 - Predictable Biases

In seeing what is happening during a change it is helpful to understand that you will be surrounded by predictable biases in forecasting. For instance, people rarely predict that a business or economic trend will peak and then decline…

A third common bias is that, in a time of transition, the standard advice offered by consultants and other analysts will be to adopt the strategies of those competitors that are currently the largest, the most profitable, or showing the largest rates of stock price appreciation. Or, more simply, they predict that the future winners will be, or will look like, the current apparent winners…

Guidepost 4 - Incumbent Response

This guidepost points to the importance of understanding the structure of incumbent responses to a wave of change. In general, we expect incumbent firms to resist a transition that threatens to undermine the complex skills and valuable positions they have accumulated over time…

Guidepost 5 - Attractor States

In thinking about change I have found it very helpful to use the concept of an attractor state. An industry attractor state describes how the industry “should” work in the light of technological forces and the structure of demand. By saying “should,” I mean to emphasize an evolution in the direction of efficiency—meeting the needs and demands of buyers as efficiently as possible. Having a clear point of view about an industry’s attractor state helps one ride the wave of change with more grace…

An attractor state provides a sense of direction for the future evolution of an industry. There is no guarantee that this state will come to be, but it does represent a gravitylike pull…

The strategic challenge for the New York Times and the Chicago Tribune is not “moving online” or “more advertising,” but unbundling their activities.

In this unbundled attractor state, it is very likely that there would be a continuing market for local news, weather, and sports reported by a daily newspaper, although it would have to operate with less overhead and less pretension than the current New York Times.

Even with its engines on hard reverse, a supertanker can take one mile to come to a stop. This property of mass—resistance to a change in motion—is inertia. 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 company’s basic functioning.

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 several important implications for strategy:

• Successful strategies often owe a great deal to the inertia and inefficiency of rivals… Understanding the inertia of rivals may be just as vital as understanding your own strengths.

• An organization’s greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia. In such a situation, organizational renewal becomes a priority. Transforming a complex organization is an intensely strategic challenge. Leaders must diagnose the causes and effects of entropy and inertia, create a sensible guiding policy for effecting change, and design a set of coherent actions designed to alter routines, culture, and the structure of power and influence.

Organizational inertia generally falls into one of three categories: the inertia of routine, cultural inertia, and inertia by proxy…

The Inertia of Routine

… These routines not only limit action to the familiar, they also filter and shape managers’ perceptions of issues. An organization’s standard routines and methods act to preserve old ways of categorizing and processing information…

Deregulation acted to suddenly release many constraints on action, but many of the moves made in the first few years were guided by old rules of thumb rather than the realities of the new situation…

Despite deregulation, the CEO’s animated speeches on how the company had a new, competitive spirit, and an aggressive posture assumed by the senior management group, the company’s planning, pricing, and marketing routines were unchanged from the era of regulation. The new competitive spirit was pure aggressiveness, unalloyed by craft…

Inertia due to obsolete or inappropriate routines can be fixed. The barriers are the perceptions of top management. If senior leaders become convinced that new routines are essential, change can be quick…

The Inertia of Culture

… We use the word “culture” to mark the elements of social behavior and meaning that are stable and strongly resist change…

The cultures of organizations are more lightly held than those of nationality, religion, or ethnicity. Still, it is dangerous to think that organizational culture can be changed quickly or easily.

The first step in breaking organizational culture inertia is simplification. This helps to eliminate the complex routines, processes, and hidden bargains among units that mask waste and inefficiency. Strip out excess layers of administration and halt nonessential operations—sell them off, close them down, spin them off, or outsource the services. Coordinating committees and a myriad of complex initiatives need to be disbanded. The simpler structure will begin to illuminate obsolete units, inefficiency, and simple bad behavior that was hidden from sight by complex overlays of administration and self-interest.

After the first round of simplification, it may be necessary to fragment the operating units. This will be the case when units do not need to work in close coordination—when they are basically separable. Such fragmentation breaks political coalitions, cuts the comfort of cross-subsidies, and exposes a larger number of smaller units to leadership’s scrutiny of their operations and performance. After this round of fragmentation, and more simplification, it is necessary to perform a triage. Some units will be closed, some will be repaired, and some will form the nuclei of a new structure. The triage must be based on both performance and culture—you cannot afford to have a high-performing unit with a terrible culture infect the others. The “repair” third of the triaged units must then be put through individual transformation and renewal maneuvers.

Changing a unit’s culture means changing its members’ work norms and work-related values. These norms are established, held, and enforced daily by small social groups that take their cue from the group’s high-status member—the alpha. In general, to change the group’s norms, the alpha member must be replaced by someone who expresses different norms and values. All this is speeded along if a challenging goal is set. The purpose of the challenge is not performance per se, but building new work habits and routines within the unit…

Inertia by Proxy

A lack of response is not always an indication of sticky routines or a frozen culture. A business may choose to not respond to change or attack because responding would undermine still-valuable streams of profit. Those streams of profit persist because of their customers’ inertia—a form of inertia by proxy…

The important implication for competitors was that, at that moment, a rival could poach customers away from PSFS without triggering a competitive response…

Inertia by proxy disappears when the organization decides that adapting to changed circumstances is more important than hanging on to old profit streams. This can happen quite suddenly, as it did in telecommunications after 1999. Attackers who have taken business away from an apparently sleepy firm may find themselves suddenly without any profits.

Entropy

It is not hard to see entropy at work… Despite all the high-level concepts consultants advertise, the bread and butter of every consultant’s business is undoing entropy—cleaning up the debris and weeds that grow in every organizational garden.

I call this a hump chart. Whenever you can assign profit or gain to individual products, outlets, areas, segments, or any other portion of the total, you can build a hump chart.

None of this improvement came from a deep entrepreneurial insight or from innovation. It was all just management—just undoing the accumulated clutter and waste from years of entropy at work.

Sloan’s product policy is an example of design, of order imposed on chaos. Making such a policy work takes more than a plan on a piece of paper. Each quarter, each year, each decade, corporate leadership must work to maintain the coherence of the design. Without constant attention, the design decays. Without active maintenance, the lines demarking products become blurred, and coherence is lost.

Like a parent who must resist fourteen-year-olds’ pushing for beer at the party, corporate management’s job is to resist these imprecations and preserve the design. If the design becomes obsolete, management’s job is to create a new way of coordinating efforts so that the competitive energy is directed outward instead of inward.

Business leaders tend to see competition as a cleansing wind, blowing away waste and abuse. But the world is not that simple. If you invest in advertising or product development to take business away from a competitor, that may increase the corporate pie. But if you invest to take business away from a sister brand or division, that may make the whole corporate pie smaller. Not only are the investments in advertising and development partially wasted, but you have probably pushed down the prices of both brands.

By contrast, the problems affecting General Motors in 2008 were created by decades of entropy combined with inertia due to embedded obsolete routines, frozen culture, and chain-link systems. Bankruptcy may not be enough to fix this difficult situation. I expect to see the company fragment further and sell off valuable brand names over the next decade.

Nvidia jumped from nowhere to dominance almost purely with good strategy. Follow the story of Nvidia and you will clearly see the kernel of a good strategy at work: diagnosis, guiding policy, and coherent action. You will also glimpse almost every building block of good strategy: intelligent anticipation, a guiding policy that reduced complexity, the power of design, focus, using advantage, riding a dynamic wave of change, and the important role played by the inertia and disarray of rivals.

When a product gives a buyer an advantage in competition with others, there will be an especially rapid uptake of the product.

On the demand side, management judged that the market would buy virtually all the graphics processing power that could be provided.

The benefit of a faster cycle is that the product will be best in class more often. Compared to a competitor working on an eighteen-month cycle, Nvidia’s six-month cycle would mean that its chip would be the better product about 83 percent of the time.

Note that, in general, if you have a “me-too” product, you prefer fragmented retail buyers. On the other hand, if you have a better product, a powerful buyer such as Dell can help it see the light of day.

Whenever a company succeeds greatly there is a complementary story of impeded competitive response. Sometimes the impediment is the innovator’s patent or similar protection, but more often it is an unwillingness or inability to replicate the innovator’s policies.

Spreading its resources too thin, it attempted to compensate by stretching the goals for its next high-performance chip beyond the competencies of its development process. In the last months of 2000, 3dfx closed its doors, selling its patents, brands, and inventory to Nvidia, where many of its talented engineers wound up working.

McCracken’s “grow by 50 percent” is classic bad strategy. It is the kind of nonsense that passes for strategy in too many companies. First, he was setting a goal, not designing a way to deal with his company’s challenge. Second, growth is the outcome of a successful strategy, and attempts to engineer growth are exercises in magical thinking. In this case, the growth SGI engineered was accomplished by rolling up a number of other firms whose workstation strategies had also run out of steam.

Passing on ArtX was a strategic blunder by Nvidia. The network of human capital in this industry was sparse and well understood. Had there been many pockets of talent like ArtX, acquiring it would make no sense. But even though Nvidia did not need the extra expertise, acquiring it would deny these scarce competencies to a competitor.

In creating strategy, it is often important to take on the viewpoints of others, seeing how the situation looks to a rival or to a customer. Advice to do this is both often given and taken. Yet this advice skips over what is possibly the most useful shift in viewpoint: thinking about your own thinking.

Good strategy is built on functional knowledge about what works, what doesn’t, and why. Generally available functional knowledge is essential, but because it is available to all, it can rarely be decisive. The most precious functional knowledge is proprietary, available only to your organization.

Barry’s attack hits home. I had once been an engineer, and I know an engineer doesn’t design a bridge that might hold its load. An engineer starts with complexity and crafts certainty. I knew what it was like to be careful, to balance literally thousands of considerations in making a system work.

In the same way, a good business strategy deals with the edge between the known and the unknown. Again, it is competition with others that pushes us to edges of knowledge. Only there are found the opportunities to keep ahead of rivals. There is no avoiding it. That uneasy sense of ambiguity you feel is real. It is the scent of opportunity…

Similarly, we test a new strategic insight against well-established principles and against our accumulated knowledge about the business. If it passes those hurdles, we are faced with trying it out and seeing what happens.

Given that we are working on the edge, asking for a strategy that is guaranteed to work is like asking a scientist for a hypothesis that is guaranteed to be true—it is a dumb request. The problem of coming up with a good strategy has the same logical structure as the problem of coming up with a good scientific hypothesis. The key differences are that most scientific knowledge is broadly shared, whereas you are working with accumulated wisdom about your business and your industry that is unlike anyone else’s.

A good strategy is, in the end, a hypothesis about what will work. Not a wild theory, but an educated judgment. And there isn’t anyone more educated about your businesses than the group in this room.

In a changing world, a good strategy must have an entrepreneurial component. That is, it must embody some ideas or insights into new combinations of resources for dealing with new risks and opportunities.

To generate a strategy, one must put aside the comfort and security of pure deduction and launch into the murkier waters of induction, analogy, judgment, and insight.

Good strategy work is necessarily empirical and pragmatic.

... the basic method of good businesspeople is intense attention to data and to what works.

An anomaly is a fact that doesn’t fit received wisdom. To a certain kind of mind, an anomaly is an annoying blemish on the perfect skin of explanation. But to others, an anomaly marks an opportunity to learn something, perhaps something very valuable. In science, anomalies are the frontier, where the action is.

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.

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.

Integration is not always a good idea. When a company can buy perfectly good products and services from outside suppliers, it is usually wasteful to go through the expense and trouble of mastering a new set of business operations. However, when the core of a business strategy requires the mutual adjustment of multiple elements, and especially when there is important learning to be captured about interactions across business elements, then it may be vital to own and control these elements of the business mix.

The interview reminded him about his broader situation and the things he had to do to move forward. He was essentially reminded of his “list” and various priorities during our conversation.

Making a list is a basic tool for overcoming our own cognitive limitations. The list itself counters forgetfulness. The act of making a list forces us to reflect on the relative urgency and importance of issues. And making a list of “things to do, now” rather than “things to worry about” forces us to resolve concerns into actions.

Being strategic is being less myopic—less shortsighted—than others.

When it came to recommending a course of action, almost everyone chose the first one they thought of.

This is predictable. Most people, most of the time, solve problems by grabbing the first solution that pops into their heads—the first insight. In a large number of situations this is reasonable. It is the efficient way to get through life. We simply don’t have the time, energy, or mental space to do a full and complete analysis of every issue we face.

For example, people tend to place more weight on vivid examples than on broad statistical evidence.

... the most experienced executives are actually the quickest to sense that a real strategic situation is impervious to so-called decision analysis. They know that dealing with a strategy situation is, in the end, all about making good judgments. So, they make a judgment call.

Facing a complex situation like this makes most people uncomfortable. The more seriously you take it, the more you will see it as a real and difficult challenge that requires a coherent response. And that realization will, in turn, make you even more uncomfortable.

Under pressure to develop a way out of the difficulty, that first idea is a welcome relief.

The problem is that there might be better ideas out there, just beyond the edge of our vision. But we accept early closure because letting go of a judgment is painful and disconcerting. To search for a new insight, one would have to put aside the comfort of being oriented and once again cast around in choppy waters for a new source of stability. There is the fear of coming up empty-handed. Plus, it is unnatural, even painful, to question our own ideas.

You can choose how you will approach a problem; you can guide your own thinking about it.” I want them to see that this is the heart of the matter. This personal skill is more important than any one so-called strategy concept, tool, matrix, or analytical framework. It is the ability to think about your own thinking, to make judgments about your own judgments.

To create strategy in any arena requires a great deal of knowledge about the specifics. There is no substitute for on-the-ground experience.

To guide your own thinking in strategy work, you must cultivate three essential skills or habits. First, you must have a variety of tools for fighting your own myopia and for guiding your own attention. Second, you must develop the ability to question your own judgment. If your reasoning cannot withstand a vigorous attack, your strategy cannot be expected to stand in the face of real competition. Third, you must cultivate the habit of making and recording judgments so that you can improve.

The Kernel

The kernel is a list reminding us that a good strategy has, at a minimum, three essential components: a diagnosis of the situation, the choice of an overall guiding policy, and the design of coherent action.

There is nothing wrong with a localized insight. We have no real control over the process of insight and should be glad when it works at all. What the kernel does, however, is remind us that a strategy is more than a localized insight.

People normally think of strategy in terms of action—a strategy is what an organization does. But strategy also embodies an approach to overcoming some difficulty. Identifying the difficulties and obstacles will give you a much clearer picture of the pattern of existing and possible strategies.

Create-Destroy

… 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.

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?

I am reminded that good strategies are usually “corner solutions.” That is, they emphasize focus over compromise. They focus on one aspect of the situation, not trying to be all things to all people.

When it works, it does so because we humans have built-in software for understanding other humans, software that is more expert at recognizing and recalling personalities than at almost anything else.

Good judgment is hard to define and harder still to acquire. Certainly some part of good judgment seems to be innate, connected with having a balanced character and an understanding of other people. Still, I am convinced that judgment can be improved with practice. For that practice to be effective, you should first commit your judgments to writing.

The same principle applies to any meeting you attend. What issues do you expect to arise in the meeting? Who will take which position? Privately commit yourself in advance to some judgments about these issues, and you will have daily opportunities to learn, improve, and recalibrate your judgment.

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. Being independent without being eccentric and doubting without being a curmudgeon are some of the most difficult things a person can do.

Social herding presses us to think that everything is OK (or not OK) because everyone else is saying so. The inside view presses us to ignore the lessons of other times and other places, believing that our company, our nation, our new venture, or our era is different. It is important to push back against these biases. You can do this by paying attention to real-world data that refutes the echo-chamber chanting of the crowd—and by learning the lessons taught by history and by other people in other places.

Stewart Resnick, the chairman of privately held Roll International Corporation, and his wife, Lynda, are serial entrepreneurs.

Geoffrey Moore’s influential 1991 book, Crossing the Chasm: Marketing and Selling Technology Products to Mainstream Customers. This book popularized academics’ concepts of “network externalities” and “standards lock-in” and was the bible for people who wanted to be, or to spot, the next Microsoft.