The Mind of the Strategist

1. Strategic Thinking Begins with Analytical Dissection

Faced with problems, trends, events, or situations that appear to constitute a harmonious whole or come packaged as a whole by the common sense of the day, the strategic thinker dissects them into their constituent parts.

Deconstruction is Key. Strategic thinking starts with breaking down complex situations into smaller, manageable components. This analytical approach allows strategists to understand the underlying dynamics and identify opportunities for advantage. The example of the travel agency's brochure illustrates this point, where dissecting the package reveals the disproportionate cost of the "sport" element.

Beyond Linear Models. Real-world scenarios rarely conform to simple, linear models. Strategic thinkers must employ non-linear thinking to dissect situations and reassemble elements for maximum advantage. This contrasts with mechanical systems approaches and purely intuitive decision-making.

Critical Issue Identification. Pinpointing the critical issue is vital for effective problem-solving. Framing questions in a solution-oriented manner, such as "Is the workforce large enough?" rather than "How to reduce overtime?" can lead to more direct and impactful solutions. Issue diagrams and profit diagrams are useful tools for this process.

2. Competitive Advantage is the Essence of Business Strategy

What business strategy is all about-what distinguishes it from all other kinds of business planning-is, in a word, competitive advantage.

Relative Strength Matters. Business strategy is fundamentally about gaining a sustainable edge over competitors. It's not enough to improve internal operations; the goal is to alter the company's strength relative to its rivals. This relative strength is more urgent than absolute improvements.

Four Strategic Routes. There are four primary ways to strengthen a company's competitive position:

• Focusing on Key Factors for Success (KFS)
• Building on Relative Superiority
• Pursuing Aggressive Initiatives
• Exploiting Strategic Degrees of Freedom

Avoiding Head-on Competition. The strategist's aim is to avoid direct, easily replicable competition. Price wars and simple cost-cutting measures are often self-defeating. The goal is to create advantages that are difficult for competitors to follow and to extend those advantages over time.

3. Key Factors for Success Demand Focused Resource Allocation

If you can identify the areas which really hold the key to success in your industry and apply the right mix of resources to them, you may be able to put yourself into a position of real competitive superiority.

Concentrate on What Matters. In an environment of scarce resources, it's crucial to focus on the key functional or operating areas that are decisive for success. Allocating resources in the same way as competitors yields no competitive edge.

Two Approaches to Identification:

• Dissect the market to identify key segments
• Analyze differences between winning and losing companies

Examples of KFS. The shipbuilding company's product-market matrix and the forklift truck manufacturer's focus on specific customer segments demonstrate how dissecting the market can reveal strategic opportunities. The uranium industry's reliance on raw materials sourcing and the elevator industry's dependence on servicing networks highlight how KFS vary by industry.

4. Relative Superiority Exploits Competitive Asymmetries

Among companies competing within the same industry or business, there are cases in which even though a company enjoys no initial advantage over its competitors and the KFS struggle is being waged with equal vigor by all the companies concerned, a relative advantage can still be achieved by exploiting any difference in competitive conditions between the company and its rivals.

Unique Strengths. Companies should identify and leverage their unique product strengths to gain market share. This can involve comparing products with those of competitors and analyzing differences to achieve advantages in price or costs.

Sakura Film Example. Sakura film introduced a 24-exposure film at the same price as competitors' 20-exposure film, drawing attention to the economic issue, where it had a relative advantage, and away from the image issue, where it could not win.

Financial Strength. One of the greatest obstacles confronting a company that tries to compete with the established giants, apart from the prodigious sales efforts such giants can deploy, is financial strength.

5. Aggressive Initiatives Challenge Industry Conventions

The strategist's method is very simply to challenge the prevailing assumptions with a single question: Why? and to put the same question relentlessly to those responsible for the current way of doing things until they are sick of it.

Break the Bottlenecks. Strategic thinking, consistency, and coherence are the strategist's weapons. The goal is to clear away confusion and break the bottlenecks that hinder the company's progress. This involves challenging prevailing assumptions and questioning the status quo.

Toyota's Just-in-Time Production. Mr. Taiichi Ohno of Toyota Motor Company wondered why it should be necessary to stockpile large quantities of components for production. As a result of his question, the company introduced a computer-based system that sends orders to its vendors, lists them in order of production, and gives the component suppliers-two or three weeks in advance-a production plan specifying type, quantity, delivery time, and order of delivery.

The Power of "Why?". The best way to break out of a rigid situation is to list the industry's basic assumptions and ask whether they still hold. By repeatedly asking "Why?" one can uncover fundamental bottlenecks and problems, leading to innovative solutions.

6. Strategic Degrees of Freedom Unlock Innovation

The final route to superior competitive performance turns on the concept of the degrees of strategic freedom available to a company.

Maximize User Benefit. The concept of strategic degrees of freedom (SDF) involves identifying the axes along which a company can realistically pursue improvement. This requires understanding the user's objective function and finding unexploited variables to enhance it.

Coffee Example. In the coffee-making business, variables such as bean quality, roast type, grind fineness, and water temperature can all be manipulated to deliver superior taste.

Automobile Business. Existing motor vehicles certainly do not meet these objectives, because they are constrained by availability and conditions of the road. An ideal vehicle would be able to move as the crow flies. Yet despite the limitations of their product, automakers today are not investing in the development of any helicopter like vehicles that could eventually free people from the constraints of the earth's surface.

7. Strategic Vision Requires Flexible Thinking

Strategic thinking in business must break out of the limited scope of vision that entraps deer on the highway.

Avoid Strategic Tunnel Vision. Business executives must avoid mental paralysis and narrow vision, especially under pressure. Changing the objective from "success at all costs" to "avoiding the worst" can open up a wider range of choices.

The "All or Nothing" Fallacy. Business does not operate on a binary, black-or-white principle. There is always a chance for competitive revival as long as the company is solvent.

Flexible Thinking. The true strategic thinker can respond flexibly to changes by understanding the full range of alternatives and weighing their costs and benefits. This requires posing "what if" questions and avoiding perfectionism.

8. The Strategic Triangle: Customer, Corporation, and Competition

Seen in the context of the strategic triangle, the job of the strategist is to achieve superior performance, relative to competition, in the key factors for success of the business.

Three Key Players. Any business strategy must consider the corporation itself, the customer, and the competition. These three entities form the "strategic triangle."

Strategic Planning Units (SPU). To develop an effective strategy, a business unit needs full freedom of operation vis-a-vis each of the three key players. The SPU must be able to address the total market, encompass all critical functions, and understand all key aspects of the competition.

Testing the Decision. Halfway into the process of strategy development, it is a good idea to reassess the legitimacy of the unit originally chosen by asking three key questions:

1. Are customer wants well defined and understood by the industry, and is the market segmented so that differences in those wants are treated differently?
2. Is the business unit equipped to respond functionally to the basic wants and needs of customers in the defined segments?
3. Do competitors have different sets of operating conditions that could give them a relative advantage over the business unit in question?

9. Customer-Based Strategies: Segment and Serve

In a free economy, no given market remains homogeneous, since each customer group will tend to want a slightly different service or product.

Market Segmentation. To establish a strategic edge, a corporation must segment the market and concentrate its efforts on meeting the needs of specific subsets of customers. Fine structure within the customer group offers the opportunity to establish this kind of differentiation.

Two Basic Modes of Segmentation:

• Segmentation by objectives (how customers use the product)
• Segmentation by customer coverage (the corporation's ability to serve customers)

Structural Changes. Market segments are perpetually in flux due to environmental forces. These changes present both opportunities and threats, requiring the corporation to shift resources and adapt its strategies.

10. Corporate-Based Strategies: Functional Excellence

Unlike the customer-based strategies we have just been considering, corporate-based strategies are functional.

Maximize Functional Strengths. Corporate-based strategies aim to maximize the corporation's strengths relative to the competition in key functional areas. These areas differ by industry and strategic objective.

Identifying Key Functions. The strategist needs to scrutinize the whole vertical chain of business systems involved, from raw materials to servicing after the products are sold to customers.

Selectivity and Sequencing. The corporation does not need to have a clear lead in every function. Gaining a decisive edge in one key function can eventually lead to superiority in others. Many Japanese corporations have succeeded by sequencing the improvement of functional competence.

11. Competitor-Based Strategies: Differentiation and Advantage

As we have just seen, there are several ways a company can go about reducing functional costs to become, or remain, economically competitive.

Sources of Differentiation. Competitor-based strategies focus on identifying sources of differentiation in functions ranging from purchasing to servicing. Any difference must relate to price, volume, or cost.

Leakage Analysis. "Leakage analysis" is a method of systematically exhausting the possible areas of difference between you and your competitors. Differences that are unfavorable to you can cause you to lose certain fractions of the total market.

Exploiting Tangible Advantages. Often, a company can choose to fight on the basis of its real functional strengths. Toyota's focus on service in the forklift truck industry and Japanese automobile manufacturers' relationships with employees' families are examples.

12. Corporate Strategy: Synergy and Value Creation

So far we have been examining the elements of strategy for a single business.

Beyond Business Strategy. Corporate strategy addresses how individual businesses are integrated into the total corporation and whether there is a strategy at the corporate level that differs from the sum of individual business strategies.

Three Kinds of Corporations:

• Single-product
• Conglomerate
• Diversified

Product Portfolio Management (PPM). PPM is a tool for optimizing the overall corporate objective function. However, it can lead to a neglect of creativity, imagination, and persistence.

Last updated: March 18, 2025