On Strategy

Strategy has become one of the most abused words in business. Plenty of companies that claim one have a plan instead, or worse, a set of aspirations dressed up in a slide deck. Strategy is the hard, honest act of deciding what you will do, what you will refuse to do, and why you believe it will work when most alternatives won’t.

Strategy answers three questions:

• Where are you now?
• Where are you going?
• How will you get there?

The questions are simple enough to fit on the back of a napkin. The answers, if they’re good, will take everything you have.

I. Where are you now?

Most strategic failures begin with a misdiagnosis of the present. Companies tell themselves stories about their own strength. They confuse revenue with health and activity with progress. Before you can go anywhere, you have to know exactly where you stand, and be ruthless about it.

A proper diagnosis examines four areas:

Market

Understand your market the way a physicist understands a system. How large is it? How fast is it moving, and in which direction? Who else is competing, and on what basis? The market you mapped eighteen months ago has already moved. If your picture of the competitive environment is static, it’s wrong.

• Size: How large is the market, and what are the key segments?
• Growth: How fast has each segment grown, and how is that trajectory changing?
• Structure: Who are the competitors, what is the basis of competition, and how is the market being disrupted?

Economics

Understand your economics the way an owner would. The balance sheet should give you room to act rather than keep you up at night, and capital structure is a strategic choice as much as an accounting one.

• Revenue: Where does your revenue actually come from? Not in aggregate, but by customer, product, and geography. Which segments are growing? Which are quietly dying?
• Costs: What does your cost structure look like, and how does it compare not to your own history but to the best operators in the world?
• Profitability: What is the profitability mix across your business? How is it shifting? How do you compare to best-in-class?
• Balance sheet: Do you have ample liquidity, manageable debt, and opportunities to reduce working capital?

Customer and Operations

Understand your customer as someone who has sat across the table from them would: the person who decides whether to give you their money, rather than the “target demographic” in a strategy deck.

• Customer: Who is the target customer? What is the overall experience and retention?
• Value proposition: What do you offer that competitors don’t? How do you compare on the criteria that actually drive purchase decisions?
• Operations: How do your operational metrics (delivery times, defect rates, uptime) compare to historical levels and best-in-class performance?

People and Culture

Understand your people with the honesty most leaders avoid. Talent is not evenly distributed within an organization. A small number of people in a small number of roles disproportionately determine outcomes. Culture, whatever the poster on the wall says, is the set of behaviors that actually get rewarded. If the behaviors you reward are misaligned with the strategy you espouse, the behaviors will win every time.

• Talent: What is the quality of your team? What are the critical roles, and do you have the right people in them?
• Culture: How engaged and committed are your people? Is the culture aligned to the strategy, or working against it?

The output of this exercise should be uncomfortable. If you finish diagnosing your position and feel good about everything, you haven’t gone deep enough. A proper diagnosis surfaces your strengths, exposes your weaknesses, identifies the opportunities you’ve been ignoring, and names the threats you’ve been hoping would go away. The point is to see clearly, because everything that follows depends on it.

II. Where are you going?

This is where most strategies collapse, and usually because people refuse to choose rather than because they can’t dream. Much of strategy is the discipline of saying no. Choosing where to play and how to win means closing doors, and closing doors is painful. So most companies hedge. They try to be everything to everyone, “keep their options open,” and spread their resources so thin across so many priorities that they achieve none of them.

Where to Play

Where to play is the question of focus: which arena you compete in. These choices feel obvious once they’re made, but making them means confronting what you’ll leave behind. The world kept wanting pictures; Polaroid failed because it defined its arena as “instant film” while the arena was shifting to “digital images.”

Part of the work is deciding how these choices should change over time: entering new geographies, exiting non-core segments, moving from manufacturing to distribution or from a product to a platform. Choosing is hard and confines you to a particular path, but it also frees your time, talent, and energy for the handful of areas that matter.

How to Win

Showing up in an attractive market isn’t enough. You need a reason to believe you’ll generate returns above the cost of capital, sustainably, despite the best efforts of well-funded competitors to take your share. Buffett’s word for that reason is a moat, and in practice very few businesses have one.

Pat Dorsey, writing up Buffett’s idea, sorts moats into four kinds: switching costs, where leaving costs more than an alternative is worth (enterprise software, cheap to keep and risky to replace); intangible assets such as brands, patents, and licenses; cost advantages that come from process, scale, or location rather than from trying harder; and network effects, where each new user makes the product more valuable to the existing ones.

Lacking a moat is common, and no moral failing. If you don’t have one, your strategy should either build one (a differentiated brand, products with higher switching costs) or accept that you’ll compete on operational excellence, which means running harder and faster than everyone else, forever. That can work, but it is exhausting, and the moment you slow down you lose.

If you do have a moat, every strategic decision should be evaluated by a single criterion: does this make the moat wider or narrower? Under competition a moat is either growing or shrinking, with no steady state in between, so an initiative that doesn’t strengthen the advantage is quietly letting it erode.

III. How will you get there?

Execution is where strategy meets reality. The gap between a brilliant strategy and a mediocre outcome is almost always an execution gap, and the usual cause is an organization trying to do too many things at once and doing none of them well.

A few principles that the best operators converge on:

• Less is more. Three initiatives done with focus will usually beat fifteen done with diluted attention. The discipline is in choosing what to stop doing.
• Separate foundational from breakthrough. Foundational work is improving what you already do: reducing defects, shortening delivery times, increasing retention. Breakthrough work is inventing something new: entering a market, launching a category. Most companies overinvest in breakthroughs and underinvest in foundations.
• Fix the core first. The core business almost always has more untapped potential than any adjacent opportunity. Concentrate on foundational initiatives before chasing transformational ones.
• Build flywheels, not to-do lists. The best strategies create virtuous cycles where each initiative reinforces the others.

Aldi shows what this looks like. Low cost is its whole strategy and its identity, rather than one advantage among several. Three employees run an entire store because every worker is cross-trained. Products sit in their shipping boxes because proper shelving would add cost without value. Advertising spend is negligible because the prices advertise themselves. Each decision feeds the same flywheel: lower costs enable lower prices, which attract more customers, which drive more volume, which reduce costs further, and each turn widens the moat.

Great execution looks like that: coherence rather than heroic effort, with every initiative and every hire pulling in the same direction.

Strategy is ultimately about resource allocation under uncertainty. You have limited capital, limited time, and limited attention. The companies that win are rarely the ones working hardest; they see most clearly where they are, choose most decisively where they’re going, and execute relentlessly on the path between.

The three questions never stop being relevant. Markets change, competitors adapt, your own organization evolves, and the diagnosis you did last year is already out of date.

Without the jargon, it comes down to knowing where you stand, deciding where you’re going, and not trying to do everything at once. That fits in a sentence and takes a career to get right.