Seven Strategy Questions

1. Define Your Primary Customer to Focus Resources

If your competitors are dedicating every ounce of their resources to create a laser-like focus on a single primary customer, they will beat you every time.

Allocate resources optimally. The most critical strategic decision is identifying your primary customer. This choice dictates how you allocate all your resources. Trying to serve multiple primary customers simultaneously leads to spreading resources too thin, a "peanut butter" approach that results in underperformance. Clarity allows you to devote maximum resources to meeting one primary customer's needs.

Avoid serving everyone. Answering that you have "multiple customers" is a recipe for failure. The competitor with a clear focus will always win. Examples like McDonald's shifting from real estate developers to consumers, or Home Depot refocusing on homeowners after a failed attempt to serve contractors, show the power of this clarity. Your primary customer should be in the sweet spot of your perspective, capabilities, and profit potential.

Organize around customers. Once the primary customer is defined, organize your company and allocate resources to maximize value for them. This might mean centralizing for efficiency (like MasterCard focusing on large banks) or decentralizing for customization (like Visa focusing on regional banks). Minimize resources devoted to other constituents, delegating their needs to specialized staff groups, but ensure these groups are "just good enough," not gold-plated.

2. Prioritize Core Values: Who Comes First?

Core values should tell people whose interests to put first when faced with difficult choices.

Values guide decisions. Beyond aspirational lists, core values must provide clear guidance on whose interests take precedence when difficult trade-offs arise. This is essential for decentralized organizations where employees make choices daily. The priority among shareholders, employees, and customers defines your fundamental theory of value creation.

Three main choices. Companies can prioritize shareholders (focusing on profit maximization, often using stock incentives), employees (believing well-treated employees serve customers better, like Southwest Airlines), or customers (believing satisfied customers drive long-term success, like Merck or Johnson & Johnson). There's no single "right" choice, but making one and communicating it is vital. Fannie Mae's failure stemmed partly from confusion over prioritizing shareholders or homeowners.

Recognize responsibility to others. Regardless of who comes first, core values must also stipulate a minimum level of responsibility to other constituents (communities, regulators, etc.). A "do no harm" standard ensures actions don't fatally erode confidence or damage reputation, as seen with Toyota's quality issues or Citigroup's regulatory problems. Companies like J&J explicitly list responsibilities in their credo, providing a long-term perspective and guiding tough decisions like the Tylenol recall.

3. Track Critical Performance Variables, Not Everything

management attention is your scarcest resource.

Focus on what matters. Tracking performance goals is crucial, but too many measures overwhelm managers and dilute focus. Scorecards with dozens of metrics confuse people and dictate how they should work, stifling innovation. Your job is to identify the critical variables that truly drive strategic success or failure.

Develop a theory of value. To identify critical variables, articulate your theory of value creation. Explain how inputs, processes, and outputs link to create value. This clarifies why certain measures are chosen and allows testing of assumptions. Marriott's simple theory links employee satisfaction to guest satisfaction, driving focus on four key measures.

Identify failure points. A powerful technique is to imagine your strategy failing years from now. What three things could cause this disaster? These are your truly critical variables. Focus your attention and measurement systems on these few vital signs. Nordstrom tracks sales per hour as a proxy for customer loyalty, recognizing the critical role of sales associates. Aim for around seven measures per person or unit – enough to stimulate creativity, few enough to remember and act upon.

4. Set Strategic Boundaries: What NOT to Do

All leaders can utilize the power of negative thinking.

Control strategic risk. Every strategy faces the risk that employee actions could damage reputation or divert resources. Strategic boundaries, stated in the negative ("do not"), inoculate the business against these risks. Unlike detailed procedures, boundaries provide freedom within defined limits, essential for entrepreneurial cultures.

Protect reputation. Certain actions can fatally erode confidence. Strategic boundaries tailored to your business's specific risks protect your franchise. Examples include Walmart forbidding gifts from suppliers, McKinsey prohibiting client information disclosure, or Google banning manipulation of search rankings for advertisers. These "do nots" must be clear, communicated widely, and enforced with consequences, as GE did with Policy 20.10 after a mischarging scandal.

Avoid wrong opportunities. Boundaries also stipulate which projects or business opportunities to avoid, focusing entrepreneurial energy on the strategic agenda. Saying "no" to tempting but non-aligned opportunities prevents wasted effort and resource dilution. Edward Jones avoids high-risk instruments and day traders; ADP has strict criteria for new businesses. These boundaries, like Alfred Sloan's price ranges for GM brands, provide clarity and discipline, even if unpopular in the short term.

5. Generate Creative Tension to Spur Innovation

To spur innovation, you must break these comfortable habits.

Innovation doesn't happen naturally. While entrepreneurs face market pressure to innovate or die, larger organizations can become complacent. Your job is to import market pressures internally and generate "creative tension" – pushing people out of comfortable routines to think and act like winning competitors. This requires uncomfortable techniques, but the risk of stagnation is greater.

Techniques to create pressure. Motivate competitive behavior by setting aggressive stretch goals that require doing something completely different, not just incremental improvement. Rank individuals and units based on performance to stir adrenaline and encourage the search for best practices, as seen at Toyota or the American Cancer Society. Forced ranking, while controversial, makes performance conversations unavoidable and motivates improvement, though it carries risks if not managed ethically (e.g., Enron's "rank and yank").

Encourage cross-unit innovation. Spur collaboration and new ideas across silos by setting span of accountability wider than span of control, forcing managers to work with others to achieve goals (like Siebel Systems). Allocate corporate costs to business units to make them care about shared services. Create cross-unit teams or use matrix accountability (though matrices can add complexity and slow decisions, as P&G and HP found). These methods force interaction and shared problem-solving.

6. Build Commitment: Help Each Other Succeed

If you want to build commitment to helping others into the fabric of your organization, you must follow a different approach.

Choose your commitment type. You must decide whether your business is built on self-interest (rewarding individual performance, suitable for roles like traders) or shared commitment (people helping each other achieve common goals, essential for complex operations like Southwest Airlines' quick turnarounds). This choice requires understanding human motivation and leadership.

Theories of motivation. Theory X assumes people dislike work and need external rewards/punishments (aligning with self-interest). Theory Y posits work can be satisfying, driven by intrinsic rewards like achievement and belonging (aligning with shared commitment). Mary Kay Cosmetics uses STORM (Satisfaction, Teamwork, Opportunity, Recognition, Money) to motivate its consultants, recognizing multiple drivers beyond just money.

Build shared responsibility. To foster commitment to helping others, cultivate four attributes:

• Pride in purpose: Employees are proud of the mission (Marine Corps, Southwest's "freedom to fly").
• Identification with the group: Belonging to an exclusive, high-performing group (Southwest's hiring selectivity, Nucor's workforce).
• Trust: Confidence that others, including leaders, will support you (Nucor sharing efficiency gains, not resetting targets).
• Fairness: Equitable sharing of rewards and absence of excessive perks for those at the top (Southwest executives taking pay cuts, Nucor's flat hierarchy and bonus structure).

Compensation policies must align with the desired commitment type; horizontal and vertical pay inequities can destroy collaboration.

7. Identify Strategic Uncertainties and Adapt

Only three things in life are certain: (1) death, (2) taxes, and (3) the fact that today’s strategy won’t work tomorrow.

Anticipate change. Today's successful strategy will eventually become obsolete. Adapting to change is the final imperative. Companies that thrive long-term, like Johnson & Johnson, constantly anticipate and respond to strategic uncertainties – threats and contingencies that could invalidate their current strategy's assumptions. Failure to do so, like AOL ignoring the shift to broadband or many firms missing the asset bubble signals before the 2008 crisis, leads to decline.

Focus attention from the top. Executives must make worry healthy and productive by visibly and consistently focusing on strategic uncertainties. Everyone watches what the boss watches. Your personal focus signals what information is important and where people should search for disruptive change. A "brown leather binder" or similar tool used interactively in meetings ensures these critical issues are debated.

Use interactive control systems. These are information systems (profit plans, P&Ls, sales data) you watch consistently and use to stimulate debate. They must be simple, require face-to-face interaction, focus on strategic uncertainties, and generate action plans. J&J uses profit planning interactively, forcing managers to explain changes in forecasts and propose responses. Goldman Sachs used its daily P&L interactively to spot trouble in mortgage securities early. This process relies on bottom-up learning, requiring leaders to encourage sharing bad news and challenging assumptions without fear of reprisal, as seen with Jamie Dimon at JPMorgan Chase or Alan Mulally at Ford.

Last updated: May 12, 2025