Red and Yellow Strategy: Flip Your Strategic Thinking and Overcome Short-termism Svyatoslav Biryulin Copyright 2024 Svyatoslav Biryulin All rights reserved Self-published. Digital edition. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of Svyatoslav Biryulin. Ljubljana, Slovenia Kataložni zapis o publikaciji (CIP) pripravili v Narodni in univerzitetni knjižnici v Ljubljani COBISS.SI-ID 199100419 ISBN 978-961-07-2177-2 (ePUB) 2024 Table of Contents Chapter 1. Strategic Thinker – A Many-Eyed Giant Argus or an Oracle? Strategic thinking biases Strategic Thinker – a prophet, an oracle, a warlock, or a wizard? Or all of the above? Contemplation Questions Chapter 2. Life is a marketplace of values Marketplace of values Group exchange – organizations Why are some companies more successful than others? Contemplation Questions Chapter 3. Value Ecosystems and Value Waves Value Ecosystems Value Ecosystem Management Value Waves Quibi and Value Ecosystems Contemplation Questions Chapter 4. What Is Business? Strategic mindset Three coaches Building a business that will outlive its founders Contemplation Questions Chapter 5. Fallacies in Strategic Goal Setting Flaw #1 Flaw #2 Flaw #3 Flaw #4 Contemplation Questions Chapter 6. The dark side of strategic goals Dark sides of big goals Do we need goals? Contemplation questions Chapter 7. Strategy and Trees Business as relationships Strategy and trees Strategy as creating conditions Contemplation Questions Chapter 8. What is strategy? Strategy as a mission What does strategy mean? Strategy and goals Strategy as constitution The definition of strategy Beware of the person who sells you a book with only one page. Contemplating Questions: Chapter 9. Red and Yellow strategies Bricks and computer programs Strategy as a half-baked plan Red strategy Yellow strategy – strong strategy loosely held Yellow Bricks and Yellow Strategy: Inevitably Choosing the Yellow Strategy Strategy as continuous hypotheses testing Red and yellow strategies Contemplation questions: Chapter 10. What is NOT a strategy? Overlooked ideas Strategy and design thinking Strategy Isn't a Google Maps Route Customer-free strategy What is NOT a strategy Contemplation questions Chapter 11. Blue Ocean Fallacy Where to play Circus and business strategy The market is not an ocean First – there are no ‘red oceans’ Second – ‘blue oceans’ are here Contemplation questions Chapter 12. Sixteen Basic Human Needs And Business Strategy Why do you want what you want? Human needs Sixteen basic needs Customer needs and customer value Picturephone (1964) vs Skype (2003) Value Ecosystem Conclusion Chapter 13. Key takeaways Ecosystems Stakeholders and Value Waves Purpose, goals, and success Central principles Red and yellow strategies Market, customer needs, and customer value Stakeholder value Chapter 14. Appendix 1 Chapter 15. Appendix 2 Red strategy: 25 questions Yellow strategy: Crucial questions Chapter 1. Strategic Thinker – A Many-Eyed Giant Argus or an Oracle? "Thinking about thinking is the most important kind of thinking." Category Pirates In 2011, Wells Fargo bank earned $2.6 million in fees thanks to its new strategy, “Eight Is Great.” In 2016, it paid $185 million in fines for how it did it. In 2011, most customers used only one or two bank products. The top executives firmly decided to increase this number to eight. But workers struggled to meet demanding quotas. They began to cut corners, opened 1.5 million unauthorized deposit accounts, and made 500,000 unauthorized credit card applications for Wells customers – without their knowledge. In 2016, the regulator punished the bank for what, initially, was a good intention. … In September 2005, eBay triumphantly announced buying Skype for $2.6 billion. It had hoped the VoIP service would help users communicate better. But four years later, eBay sold Skype for $1.9 billion. For most eBay users, email was enough. … In early 2023, US automotive industry executives beamed with enthusiasm about the future of EVs. They had invested billions in new production facilities. But the market received a cold shower when the market growth sharply slowed down in the second half of 2023. “Ford has pulled back on EV investment and could delay some vehicle launches while increasing production of hybrids…It lost a staggering $4.7 billion last year on its battery-powered car business,” The Wall Street Journal reported. Mary Barra, the CEO of General Motors, said the company “wouldn’t meet a self-imposed goal of producing 400,000 EVs over a two-year period through mid-2024.” … When we think of the future, it seems so linear and logical, but reality usually turns out to be rather messy and complicated. These three cases are very different. Yet, they have a lot in common. I blame strategic thinking biases for these mistakes – and many others. Strategic thinking biases Our thinking device – the brain – evolved about 500,000 years ago. It developed (and still develops) at a snail’s pace. In the past 100,000 years, its size has only increased by 10%. Homo sapiens originated in Africa roughly 300,000 years ago. And the brains of these ancient humans were ideally suited to their lifestyle. They lived in small groups of about 150 people. They weren’t keeping track of the stock prices. They didn’t worry about product-market fit. They didn’t run organizations so large that their leaders might never meet most of the employees face to face. Their life wasn’t easy, but their strategic tasks were pretty simple – securing enough food for their families, raising children, and surviving. But look at the CEOs of modern businesses. They must think multi-dimensionally. They have to balance the conflicting interests of various groups of people. They need to foster team creativity and enforce rigorous execution discipline. They should lay the foundation for long-term success and ensure day-to-day outcomes. They are like race car drivers who must simultaneously win today’s race and upgrade their cars for future ones. To make it worse, they do not know what these future races will be like. At the same time, they still rely on pretty much the same computing devices in their heads as their distant mammoth-hunting ancestors. It’s like building AI on an old Windows XP computer. Our brains are like ancient computers running on outdated software. We stick to patterns instead of thinking things through and let emotions run the show. Our short-term memory capacity is limited to three to five items. We are physically incapable of keeping all business tasks in our heads. Like carnival jugglers, CEOs must keep multiple objects in the air at once. And these objects vary in size and weight. No wonder their strategic thinking is biased. A few years ago, when I was a CEO myself, I suffered from the same problems. Here are some examples: • We overrate shareholder value • We think that business is about getting profits • We believe that a strategic goal is what a business should aim for • We assume that strategy is a means to an end With this book, I will try to help you focus on primary business principles, which will sharpen your strategic thinking. I don’t claim to have a magic solution to all problems. Nor do I claim to have a magic wand to overcome all cognitive strategic biases – there are too many. But I will offer you a few valuable ideas. Strategic Thinker – a prophet, an oracle, a warlock, or a wizard? Or all of the above? Argus was the guardian of the heifer-nymph Io. He was nicknamed Panoptes for his hundred eyes. Even when some of them slept, others stayed open. So Argus could see everything and missed nothing. Is a strategic thinker a many-eyed creature like Argus or an oracle who predicts the future? Or both? Would that thinker be a brave captain who looks over the horizon and navigates the ship through the raging waves or a thoughtful analyst? The sad truth is that nobody knows. We live in a world of blurred definitions and made-up meanings. Igor Ansoff was the first to apply the term ‘strategy’ to business in 1965. Every HR person tells you that strategic thinking is a must for top executives. However, we lack both a shared definition of strategic thinking and a means to measure its effectiveness. Strategic thinking is what we realize we lack after making a mistake. With this book, I offer you an unconventional perspective on this issue. You may find many definitions of strategic thinking in books. They say that a strategic leader must ‘think big and bold.’ That a strategic thinker should ‘challenge current assumptions’ and ‘anticipate the future.’ To ‘see the big picture.’ I am far from asserting that these definitions are wrong. But I don’t know how one can master the ‘bold thinking’ skill or develop the art of ‘seeing the big picture.’ I haven’t met an executive or entrepreneur who learned to think strategically simply by ‘dreaming big.’ Over the years, as a CEO, a board member, and a strategy consultant, I have developed my own practical approach to strategic thinking. I have participated in hundreds of strategy discussions and conducted dozens of strategic retreats. The company I led went through a major strategic crisis in 2008, survived, and found a new path to success. This book offers a distilled summary of my experience of strategic thinking. It is not a textbook or a how-to manual. I will offer you practical strategy development tools in a future book. This mini-book is devoted to only one topic – strategic thinking. It involves understanding and applying some fundamental laws that we too often forget about when devising a strategy. Contemplation Questions Strategy is the answer to several correct questions. At the end of each chapter, I will offer you several questions for reflection. By contemplating the answers, you will be able to sharpen your strategic thinking. Questions for this chapter: – Do you believe you allocate enough time for strategic thinking? – Do you contemplate different strategic issues every day? – Does your team do the same? – Do you discuss strategic questions with your team regularly? – Do you find these discussions productive? Chapter 2. Life is a marketplace of values "The ultimate goal of our existence is interaction. Man is a social being. We need each other, and that's it." Dr. Ichak Kalderon Adizes What do the New York Stock Exchange and your birthday party have in common? What does Amazon have in common with a school library? They are more similar than you may think. Marketplace of values It appears that the first homo sapiens should have been doomed. They didn’t run faster than predators. They didn’t have a keen sense of smell or sharp claws. They didn’t see in the dark. But they survived and evolved through communication skills. A group turned out to be stronger than an individual. But communication skills weren’t only about gossiping or coordinating actions during hunting. They paved the way for complex social contracts. The earliest social contracts were simple – hunters traded bear skins for stone axes. However, contracts grew more complex over time. Sophisticated forms of exchanging intangible values emerged – such as family, community, or society. The first businesses – although it would be a stretch to call them that – emerged. Business is a complex form of value exchange involving more than two parties. Our life is all about value exchange. Only those who give more than others receive more than others. At work, we exchange our time and energy for money and, if we are lucky, interesting tasks. A bakery at the corner and an international behemoth both trade values with their customers and suppliers. We share emotions with our friends and family. The value we give and receive may be intangible. Our societies and communities are vast marketplaces of value. For instance, we obey the rules in return for social benefits and status. When you stop at a red light, you sacrifice freedom for your and others’ safety. We play by the rules and expect others to do the same. Even dictatorships offer their citizens protection from external enemies (most likely fictitious ones) in return for limiting their civil rights. Value can alter its forms during the exchange. For instance, a father exchanges his time and energy to earn enough to afford a good education for his daughter. However, his efforts don’t immediately translate into a monetary value for the daughter. Instead, she receives positive emotions from her father’s love and care and a chance to build a decent career. Even when you sleep, you voluntarily turn yourself off for eight hours to restore your energy and strength. Money itself doesn’t have any value. But it is a universal medium of exchange for many types of deals. Unless you are a hermit in a desert, you’re always involved in some kind of social exchange. Success is the ability to gain more value by entering into beneficial social contracts. Group exchange – organizations When an ancient hunter swapped furs for a bow and arrows, it was an individual exchange. However, the process followed by an ancient craftsman to produce a weapon fundamentally differs from how Amazon, Temu, Apple, Samsung, and any other company operate because organizations have to cater both to the needs of their customers and employees. When you buy a bottle of wine at a grocery store, you exchange the value you possess – money – for the value this organization can offer – reasonably priced wine. But the store couldn’t deliver value to you without producing value for many people who made the deal possible. Every business has employees, shareholders, suppliers, and customers. We’ll delve into the matter in more detail in the next chapter. But here, it’s essential to note that any organization – for-profit or non-profit, private or public – is a machine that trades value with multiple groups of people. An organization leader is someone who tries to build such value for a group of people that they are willing to create value for other groups. And the ability to do it efficiently is key to the organization’s success. Why are some companies more successful than others? The Terman Study of the Gifted is a famous scientific work on the correlation between IQ and individual success. Lewis Terman began the study at Stanford in 1921. He and his team selected 1,528 gifted children and followed their lives over many years. After Terman’s death in 1956, other researchers continued his work. The findings are well-known. Despite providing many possibilities, such as a solid education, more than a high IQ is needed to ensure success in the traditional sense. The lives of the gifted children turned out very differently. A high IQ also doesn’t guarantee success in business. As Warren Buffet said, “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.” You won’t find many professors, philosophers, or chess grandmasters on the lists of the most successful business people. Numerous studies, such as this one, "Beyond social capital: The role of social skills in entrepreneurs' success," confirm that social skills, such as effective communication, are crucial for success in a corporate environment. Intellect helps us solve intellectual tasks, yet business success is a more social endeavor. Being sociable pays off. And the same applies to organizations. A business delivers value for stakeholders and exchanges it for the value they are willing to generate for the company. The more value it delivers, the more value it can gain. Apple is a company that many people dream of working for. Being a supplier for Apple is lucrative. Apple shareholders enjoy the stock price. Customers love its products. It creates a lot of value for all of its stakeholders. Any business is a value ecosystem embedded in some higher-tier ecosystems – markets and societies. This idea may not seem new. However, it fundamentally contradicts the traditional tenets of strategic management: – that an organization exists to make profits – that it must achieve its goals by winning the competition – that strategy is merely a means to an ends We will discuss this in more detail in the following chapters. Contemplation Questions – What types of value exchange is your organization involved in? – Who are the key stakeholders? – What kinds of value does your company offer to key stakeholders? – Are your stakeholders satisfied with the value your company provides for them? – What could you do to deliver more value for them? Chapter 3. Value Ecosystems and Value Waves Can you imagine a startup that raised $1.7 billion in the initial investment and shut down only six months after launch? Its name was Quibi. In 2020, they promised to revolutionize the way people are entertained. But today, its name is a synonym for failure. What went wrong? Many things did. However, the founders’ single greatest mistake was that they couldn’t incorporate their internal value ecosystem into the higher-tier external ones. Value Ecosystems Imagine any large company – Walmart, for example. What is Walmart? You can answer this question in various ways. But let’s consider it from the Value Ecosystem standpoint. First-order Value Ecosystem 2.1 million Walmart employees and shareholders found a way to work cooperatively and benefit from it. This is a first-order Value Ecosystem. Walmart’s policies, strategies, and procedures help it run smoothly. The company creates value for individuals who work for it in return for the value they deliver to it. Employees benefit from working for Walmart. Walmart benefits from their labor. Second-order Value Ecosystem The existence of Walmart wouldn’t make sense if it couldn’t provide value for stakeholders outside the organization. Walmart is nothing without its customers, suppliers, and other business partners – from truck owners to internet providers. Walmart delivers value to them, and they create value for Walmart. This is the second-order Value Ecosystem, which we usually call a market. Third-order Value Ecosystem The first-order Value Ecosystem (Walmart) and the second-order Value Ecosystem (retail market) both function within the third-order ecosystem – society. This ecosystem is made up of the population of the countries where Walmart operates, government regulators, as well as the industry watchdog groups. All members of this ecosystem have different expectations and requirements, and Walmart can’t ignore them. Walmart builds value for people even if they don’t work for it or shop there. For instance, it pays taxes. In return, the society and regulators welcome the company’s operation in their country. Any company – from a small cafe to giants like Google, Walmart, or Tesla – is successful as long as it can deliver value to every element of all three Value Ecosystems and receive enough value back from them. Like nesting dolls, value ecosystems are nested within each other. Different types of value flow to, from, and throughout any organization, morphing into different forms along the way. I call these flows Value Waves, which we will delve into later. Value Ecosystem Management “A fair exchange brings no quarrel” Danish proverb Every company must deliver value for six groups of stakeholders: Customers Employees Shareholders Business partners Regulators or watchdogs Society The business leadership does this by managing six relevant value streams, which I call Value Waves. Value Waves are sets of business processes that generate value for a particular group of stakeholders. For example, a business process that results in a regularly updated product of the required quality at a price acceptable to the customer and always in stock is a Value Wave for the customer. The process of agreeing on supply volumes, conditions, and delivery times, as well as joint programs with suppliers that enhance mutual satisfaction from working together, is a Value Wave for suppliers. The process of engaging employees and increasing their satisfaction is a Value Wave for employees. Of course, the six main Value Waves break down into smaller individual processes and subprocesses. The primary task of company leaders is to strike a balance between stakeholders’ interests, no matter how conflicting they can be. Every business rests on these six’ pillars,’ or Value Waves. Remove any of them, and it’ll collapse. If any of the stakeholder groups feel it doesn't receive enough value working for or with the company, they will likely leave. And this can upend the business. Running a business means taking measures to increase the value it delivers to key stakeholders. Business strategy is a set of practical steps to enhance the value by improving these Value Waves and building new ones. Strategic goals are clear targets that set the direction and pace of these steps for the employees. It is easy to prove this point: – If a company doesn’t deliver value for customers, it is bleeding money. – If it doesn’t yield value for employees, they leave. – If it can’t provide value for shareholders, they stop supporting it. – If the business doesn’t offer value for business partners, they don’t offer valuable benefits in return. – If it doesn’t play by the rules, regulators impose sanctions on it. – If the company disappoints the society, people can boycott its products. And vice versa – if a company leadership team understands the needs of all the key stakeholders and works day in and day out to create value, what can stop it from thriving? Customers are a specific group of stakeholders who require special attention. We will discuss this in the following chapters. Value Waves Michael Porter introduced the Value Chain concept back in 1985. In his concept, a value chain is a set of primary and support activities a business employs to create customer value. Some experts also use the term’ value chain’ to describe the entire process of producing and delivering a product, from raw materials to the store shelf. For instance, a coffee in a paper cup you buy on your way to the office was a green bean in a distant country months ago, and the cup was once a tree. I use the following terms: – A Global Value Chain includes all participants involved in producing a product, such as raw material processors, logistics companies, distributors, retailers, etc. Your business is part of at least one Global Value Chain. Global Value Chains often pass through many different societies and markets. Each link adds value to the product received from the previous link and charges for it. – A Global Value Wave includes all the processes that participants of a Global Value Chain perform, such as processing, packaging, delivery, retail sales, etc. The quality, efficiency, and cost of all processes determine the quality and cost of the final product. – If your company is part of a Global Value Chain, it performs some of these processes. This set of processes is called the Internal Value Waves. – Thus, the Global Value Wave passes through your business, too. – As a participant in a Global Value Chain and a link contributing to the Global Value Wave, you should maximize the value you create for other links and all stakeholders. – Thus, strategic choice implies answering the following questions: Which Global Value Chain should we be a part of? How will it change in the near future? What position should we take in it? Which Global Value Wave should we contribute to? How should we improve our internal processes to create more value for all stakeholders? You can see a simplified chart of the Global Value Chain and Global Value Wave for the coffee market in Figure 1. Figure 1 Figure 2 shows a simplified schematic of the Internal Value Chain and Internal Value Stream of one of the participants in the Global Value Chain – a local coffee distributor. Figure 2 Software developers or businesses in the service sector do not produce a physical product, yet they are also part of Global Value Chains. Even if your business is relatively small and you have no influence over other links, analyzing the Global Value Chain you belong to, the Global Value Wave you contribute to, and the end consumer’s needs is critically important for your long-term success. When I work with a company as a strategy consultant, we always visualize the global Value Wave with all its key contributors. We ask ourselves: what can we do to ensure the Wave flows smoothly, quickly, gaining strength along the way, and with minimal costs on our part? How can we ensure that all the Waves go through all ecosystems seamlessly and efficiently? Quibi and Value Ecosystems Social media platforms are complex ecosystems. Many of them, such as Facebook or YouTube, are basically free for users. They don’t produce products or sell them to customers like Costco, Procter & Gamble, or Apple do. They need to find a sweet spot where the interests of content creators, users, and advertisers intersect. Quibi failed to do it. Quibi’s business model involved creating 10-minute clips that would be watched on mobile during commutes. Unfortunately, it launched in 2020, when most commuters stayed home. However, that wasn’t its main problem. The model relied on A-listers instead of the Youtubers or TikTokers that people were used to watching on the go. Quibi also tried to charge users to watch the videos. It turned out to be a recipe for disaster. The relationships between value ecosystems became unbalanced, and investors lost their money. Contemplation Questions – Who are your key stakeholders? Identify all six groups – What are their needs? – How do these needs evolve over time? – What value does your business deliver to them today? – Are all of the stakeholders satisfied? – If some of them are not satisfied, what is the reason for this, and what can be done to remedy it? – What could you do to provide more value to the key stakeholders? – What are your Value Waves? What internal business processes contribute most to value creation? – Do you have a map of these processes? – How effectively do you manage these Value Waves? What can you do to improve them? Chapter 4. What Is Business? In 1954, Peter Drucker wanted to name his new book “Business Strategy”. But the publisher, Harper & Brothers, feared that such a ‘military’ title would scare away potential readers. At the time, the word ‘strategy’ was primarily linked to military theory. So, Drucker had to change the title to “The Practice Of Management”. Business strategy as a discipline inherited a lot from the military theory. Strategists like to quote Sun Tzu, a Chinese military general, strategist, and writer who lived during the Eastern Zhou period (771–256 BC). Sun Tzu is credited as the author of “The Art of War”, a go-to resource for many strategists. In the Figure 1, you may find some ideas from Sun Tzu adopted by the business theory: Figure 3 Even though we can learn some lessons from the war theory, I avoid using military terms in business discussions for two reasons: – Countries create armies to defend themselves or to defeat and destroy their enemies. People start businesses to create value for other people. – War is a zero-sum game. If one army wins, another one loses. Business is not a zero-sum game. When Apple launched the App Store in 2008, it didn’t destroy any other company; instead, it built a huge new market out of thin air. War is when a few people kill many by others’ hands. Business is when a small group of people create value for many. You can’t deploy the same mechanisms you use to demolish a building to build a new one. Similarly, I believe drawing wisdom from the war theory will be very misleading for ourselves and our employees. Strategic mindset Most strategic theories and approaches agree on two fundamental principles: 1. The primary goal for any business is measurable success. We can measure it in various ways, but most metrics relate to money: revenues, EBITDA, net profit, market capitalization, etc. For instance, the Fortune 500 list comprises the largest businesses in the USA by revenue. 2. To achieve this goal, we use managerial tools, from strategy and corporate culture to budgeting and organizational design. Figuratively speaking, we aim to get to point B from point A. Point A is where we are now. Point B is a future moment when our company is on the S&P 500 list, and our CEO’s face is on the Forbes cover. All our activities serve one purpose – to set a goal or a point B and reach it within a specified timeframe. So, strategy is like Google Maps, where we plan a route to a happy future. And this sounds reasonable. When planning your family weekend getaway, it’s worth deciding in advance where you’re going and for how long. Having a map, itinerary, and cash in your wallet also won’t hurt. In business, knowing point B and the desired moving pace allows you to make plans and allocate resources. If point B is far away, we call this ‘strategic planning.’ I don’t think this approach to strategic planning is wrong, although it is not very effective, as we will discuss in Chapters 5 through 9. But it sounds reasonable as long as we think the first premise – a company’s purpose is short-term and long-term measurable success – is right. It may sound counterintuitive or even crazy, but I’d like to doubt it. After all, we have such powerful computing machines in our heads that we should not take such clichés at face value. Three coaches Imagine three sports teams. The coach of the first one plans to win a game and prepares the team for it. The second coach plans to win a tournament. And he takes respective measures. The third coach dreams about building a great team. She believes it can lose a game or a tournament but will win long-term. Which of the three will create a legendary team? From the point of view of an MBA professor, a management consultant, or most top executives, the goal ‘to build a great team or business’ seems too vague. What does ‘great’ mean? When exactly will the coach achieve it? No board of directors would approve such a goal. Peter Drucker is credited for the idea that only what gets measured gets managed. However, I doubt that Steve Jobs, Jeff Bezos, Richard Branson, William Procter, James Gamble, or Gordon E. Moor had SMART long-term goals when they started their enterprises. Few young enthusiasts who are bootstrapping startups right now don’t dream about building a company that can make history. But as soon as they launch their product, they’ll find themselves in a world where short-term metrics measure their success: ● Quarterly profit ● Stock price ● Like-for-like sales growth ● Stock analysts forecasts We dream of leaving a mark on history yet focus on quick hits. By doing so, we resemble parents who want a great future for their kids but evaluate their success only by their semester grades. Building a business that will outlive its founders Long-term business success is as related to its quarterly results as a person’s success in life is determined by their math grades in school. Richard Branson, Steve Jobs, David Karp, John McAfee, and Kirk Kerkorian were not the first students, but they built great businesses everyone knows. Peloton’s business surged in 2021; it was an ‘A student.’ Is it as successful today as it was three years ago? One reason for Enron’s bankruptcy was that Jeffrey Skilling tried to impress investors with dizzying quarterly growth. Unfortunately, the classical business strategy theory created by titans of thought such as Peter Drucker and Michael Porter is often reduced to a tool we use to please stock analysts. This has not only distorted the essence of the theory but also biased the thinking of many businesspeople. If you start your strategic discussions by setting goals like ‘to increase our yearly profit by X percent,’ you’re on a dangerous path. You might argue that every long journey consists of small steps. Let’s set a shorter-term goal, and when we achieve it, we’ll think of the next goal, and so on. It makes perfect sense. However, as I will show you in Chapter 6 when someone has two goals, a long-term and a short-term one, the latter always dominates. The purpose of a business is to build a 'great team,' a company that will outlive its founders. It can lose a game or a tournament but will win long-term. Contemplation Questions – How do you measure your business’ success? – Do these metrics reflect the business’ ability to develop and adapt continuously? – Do they indicate the business' ability to thrive under various circumstances? – Do these metrics show the company’s capacity to outlast its founders? – What are your long-term business goals? Chapter 5. Fallacies in Strategic Goal Setting On January 5, 2024, Alaska Airlines operated a Boeing 737 MAX 9 aircraft on flight 1282 from Portland International Airport to Ontario, California, when a panel that plugs an emergency door suddenly detached at 16,000 feet, leaving a gaping hole in a cabin full of passengers. Fortunately, no one was killed or seriously injured. In March, The Wall Street Journal reported that Boeing overhauled how it paid employees’ annual bonuses. The biggest shift was in the company’s commercial unit, where safety and quality metrics would account for 60% of annual bonuses. Previously, financial incentives comprised 75% of the annual award, while the remaining 25% was tied to operational objectives, including quality and safety. Read between the lines. Before this awful accident, Boeing rewarded workers for generating value for shareholders, not for customers and other stakeholders. In an idealistic world that economists like to describe in their books, businesses compete for customer attention by creating cheaper and better products. I would like to live in such a world. But what I see every day contradicts this concept. Few business gurus have avoided mentioning the Netflix case. Netflix disrupted the market. It taught us to watch movies online. As of March 2024, its market cap is a whopping $269.48 Billion. But let’s look at some other numbers. Some 36% of Americans surveyed in the 2024 Digital Media Trends report from Deloitte say subscription video-on-demand isn’t worth their price. I don’t live in the US, but I would join these 36% of the Americans. More news from The Wall Street Journal and Fast Company: “About one-quarter of U.S. subscribers to major streaming services…have canceled at least three of them over the past two years. Two years ago, that number stood at 15%.” (source) “Visits to piracy websites have increased 12% in the past four years.” (Source) Many subscribers prefer to go to piracy websites since they are free. But I am sure a great deal of them also do it because they can watch almost any show there. If I want to watch any movie I want legally, I must pay for a subscription on nine (!) online platforms – Netflix, Disney+, Apple TV+, Hulu, Amazon Prime Video and others. Why on earth can I use one platform for music – Spotify or Apple Music – but can’t have only one video subscription? Why didn’t Netflix create such a service? I am a customer, and I am not satisfied. And I am not the only one. By the way, I’ve recently canceled my Netflix subscription. Can we still think that Netflix is a great company if so many users are dissatisfied? Apple is a wonderful company. However, the European Union authorities forced it to pay a massive fine for discriminating against partners and change some of its policies. At the time of this writing, the US authorities are starting a similar lawsuit against the company. Big enterprises are too busy being laser-focused on shareholder profits at the expense of customers’ best interests. These cases reflect the hypocrisy of modern business. Business leaders rant about values, mission, ESG, and employee and customer satisfaction at industrial events or in corporate slide decks. But, in reality, we often pay lip service and care only about shareholder value. We must create value for six stakeholder groups and manage respective Value Waves, but in reality, we prioritize one group, shareholders, over the others. I see four flaws in this approach. Flaw #1 Every business must satisfy the needs of six stakeholder groups. However, we measure success by indicators that reflect the direct interests of just one of them – shareholders. Look at what Bob Iger, the CEO of Disney, has recently said: “I’m committed to increasing long-term value for shareholders and am confident we will continue to do so through the successful execution of our core strategic priorities: the creation of high quality, branded content and experiences, the use of technology, and creating growth in numerous and exciting international markets.” Customers don’t care about your profits. Suppliers, banks, contractors, employees, and society are only indirectly interested in your success and are not its beneficiaries. Moreover, we rarely measure the satisfaction of some groups. Have you assessed the happiness of your suppliers lately? But, as discussed in Chapter 3, if one of the six pillars that underpin your business weakens, it will drag you down. Business success is not when shareholders are happy. It is when all stakeholders are happy. If a company is in the red, engaged employees and business partners can save it. But if the business is swimming in money but customers, workers, and suppliers are all turning away, it’s doomed. But that’s not all. First, customers are the only stakeholders that bring money into a business. Everyone else takes it away. But we use customer satisfaction metrics only as a tool to please shareholders by squeezing more cash out of customers’ wallets. I’ve seen few businesses that set customer satisfaction as a strategic goal. Second, words matter. Scientists affirm that people perceive an 80 percent lean hamburger as much healthier than a 20 percent fat one. When we proclaim shareholder value as the primary purpose of a business, we set a dangerous mindset. It reduces other stakeholders – customers, employees, suppliers – to mere assets. We start looking at them as resources for our success. This is why concepts like employee engagement remain just mottos rather than business drivers. For instance, according to Gallup, only 23% of workers felt engaged at work in 2022. You may argue that the only way for a business to profit in a competitive market is to care for its customers and employees. You may say that competition drives customer satisfaction by forcing companies to create better products and reduce costs. It looks like a win-win situation. Unfortunately, it works this way only in textbooks. We live in a world of compromises where we’re always trying to pay less, and businesses are always looking for ways to squeeze more profit from us. Do you often buy great products or excellent services? Do you frequently feel happy as a consumer? I doubt that. You can find far more complaints about the product quality on social media than praises. The Wall Street Journal reports: “Customer experience in the U.S. has declined for the third year in a row, according to research firm Forrester, which analyzed 98,363 consumers’ perceptions of 223 brands across 13 sectors for its latest annual report on the subject. The average score was 69.3 out of 100, its lowest since Forrester’s CX Index study adopted its current methodology in 2016.” Consumers complain about consumer goods. Suppliers complain about retailers. Business people whine about banks. Employees are disengaged. The Great Resignation and Quiet Quitting during COVID-19 serve as the evidence. Practice defeats quite a few fundamental theses from economics textbooks. Something goes wrong. Flaw #2 It’s crucial to have a point B when traveling or building a country house. But having a point B has some undesirable side effects when it comes to long-term planning. We usually set a measurable strategic goal – revenue, EBITDA, market share, etc. It helps our team focus on it, draw up a plan, and allocate resources. It makes sense. Setting a goal and choosing a specific way to reach it means deciding what we will do and what will be sacrificed. Experts call this ‘strategic focus’ and underscore its importance in articles and books. We set a BHAG, a North Star, an ambitious aspiration, and pave the way to it. Fellow consultants often quote J.F. Kennedy’s speech in Congress on May 25, 1961. In it, he proposed that the US “should commit itself to achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to the Earth.” But such reasoning seems logical only if we believe that at least one of the two following premises is correct: 1. We can foresee the future and somehow know that our goal is achievable as it was formulated. 2. Our ambitions, efforts, and hard work will enable us to change the world around us so that we will achieve it. Both premises are totally wrong. • The future is unpredictable. If you want to have some fun, re-read some future predictions made by the best experts 5-10 years ago. • Business success depends on hundreds of factors, most of which we can’t control. • If we believe that our resolution and commitment to the goal can work wonders, this is an example of so-called ‘magical thinking.’ Richard Rumelt wittily criticized this type of thinking in his book ‘Good Strategy, Bad Strategy.’ Success stories are told by those who succeeded, while those who failed remain silent. • If our objective is ambitious, it means two things. First, we’ve never been to where we’re heading, and second, we will have to do things we’ve never done before. So, the goal itself and the path to it are both terra incognita for us. And if we are somehow sure we’ll be able to achieve it, it only means we’re under an illusion. • It is impossible to set measurable goals for creating new products or capturing new markets when even the sales of proven products in existing markets regularly deviate from target values. • When you’re peering at a single point in the distance, you stop seeing the horizon. Too strong a commitment to the goal makes us blind to other threats and opportunities that arise along the way. If someone tells you they set a lofty goal and achieved it, remember about survivorship bias. The more specific our strategic goal is, the more likely we’ll have to adjust it many times along the way. This is unlikely to boost our team’s motivation. In the next chapter, I will discuss some interesting scientific findings related to goal setting. You may argue that: • If our strategic goal is too vague, we’ll never know whether we have achieved it. • We can’t allocate resources effectively without a goal. These are strong arguments. But let’s look at the issue from another angle. • Why do we believe it’s so important to set a goal and to reach it? The first successful enterprises emerged centuries before the strategic management theory did. I haven’t found hard evidence that their leaders set BHAGs. And I bet they didn't use SWOT analysis. Furthermore, I haven’t found any quotes from Steve Jobs, Jeff Bezos, Sergei Brin, or Richard Branson in which they said they have ever set numerical, specific goals. They’ve talked a lot about big dreams or ambitions, but none has ever said that SMART goals helped them succeed. • Even if you have a clear goal and allocate resources accordingly, it doesn’t guarantee success. Success does not stem from our ability to set goals but from the opportunities we see around us. These opportunities arise from customers’ unmet needs, which we will discuss in more detail in Chapter 10. Goals are selfish by nature. A strategy must be customer-oriented. Kennedy and his ‘man on the Moon’ goal is inapplicable to business. • He didn’t have customers and could not think about their needs. • He had only one competitor – the Soviet Union. • He didn’t have to adjust the goal along the way. • The value this program had to deliver was clear from the very beginning. Businesses have to constantly adjust and reconsider the value they create for stakeholders. Goals are nothing more than our mind’s defensive reaction to the unpredictability and chaos of the universe. Flaw #3 Goals are vertical, but processes are horizontal. Imagine that your strategic goal is to speed up delivery to customers because you want to make it a competitive advantage. You cascade this goal to various subgoals for the HR, IT, and logistics departments. It is supposed that when each department reaches its subgoal, the company will achieve the overarching objective. The departments can form a workgroup and launch a related project. They will sync their efforts and work hard. Will they achieve the desired result? Quite possibly. But if you don't map the respective Value Wave, chances are you'll miss something important. A Value Wave map is a process flow diagram that reflects all its aspects that can affect its outcome, or customer value, directly or indirectly. As W. Edwards Deming said, if you can't describe what you are doing as a process, you don't know what you're doing. Value Waves mapping reveals many nuances that are easy to overlook if you limit yourself to just cascading goals. For instance, you may notice some cultural or financial issues that may prevent you from delivering more value to the customers and reaching your target. Organizational structure doesn't reflect how subordinates cooperate. Goal tree doesn't reflect how you need to change your processes, or Value Waves, to deliver more value to stakeholders. Flaw #4 Every goal implies a time frame within which we must achieve it. We can’t just declare that we will hit our target someday. A goal of ‘achieving a market cap of 1 billion by 2028’ sounds much better than ‘achieving a market cap of 1 billion in the future.’ However, as Simon Sinek said, business is an infinite game. When we play football or tennis, we know that the game will inevitably come to an end. The score will show us who won. The game called business never ends – as long as the company exists. Business is not only an infinite game. It is a continuous game, not a discrete one. However, we often fall into the trap of dividing time into discrete spans, such as months, quarters, and years. Business is a game where the future meets the past and the present at every single moment. • Every decision we make in the present will not affect the present but only the future. • Our current situation is the result of our past decisions and actions. We are used to quarterly or annual plans and reports. Yet when a quarter or a year ends, it doesn’t mean that a certain page in a company’s life is turned. There are no pages in life. Quarters and years are nothing more than symbols. Life is going on continuously. When we set a three-year goal for our team, we narrow down their thinking. Humans can’t keep more than four items, plus or minus one, in working memory. The team focuses on the goal and stops looking into the future beyond it. When we become too committed to our three-year goal, we can unintentionally make decisions that will help us reach it but damage our future success. Ongoing future thinking instead of time-bound goals is a reasonable solution. Some scientific discoveries also suggest that goals have dark sides, which few people discuss. We will delve into this topic in the next chapter. Contemplation Questions – Do you set SMART goals for launching new products or entering new markets? – Have you confirmed that this approach actually works? – What's the worst that could happen if you abandon this practice? – Does this approach foster your team's creative thinking? – Have you considered how setting quarterly and annual goals affects your team’s long-term thinking—over 5, 10, or more years? – What Value Waves are most critical for your business? Chapter 6. The dark side of strategic goals “Goals are for people who care about winning once. Systems are for people who care about winning repeatedly.” James Clear In the late 1960s, the Ford Motor Company was losing market share to foreign competitors offering smaller, fuel-efficient cars. Lee Iacocca, then the company's CEO, set an ambitious goal: to develop a new car “under 2000 pounds and under $2,000 and would be available for purchase in 1970.” The Ford Pinto hit the market as planned. It was cheap and compact but had a critical defect: the fuel tank was located behind the rear axle in less than 10 inches of crush space. The Pinto could ignite in the case of impact. Later investigations revealed that after Ford had discovered the hazard, executives decided not to change the goals. They calculated that the costs of lawsuits associated with the Pinto fires would be less than the cost of fixing the design. The technical flaw ended up killing 53 people and injuring many others (source). If you believe such unethical behavior is a thing of the past, you’re wrong. Just remember the Dieselgate, the recent Tesla 'range inflation' scandal’, or many other scandals of this kind. Jim Collins and Jerry I. Porras coined the term BHAG in their 1994 bestseller “Built to Last: Successful Habits of Visionary Companies.” Following the book’s release, it's become a taboo for business leaders to avoid setting big, ambitious goals for their companies. Be bold. Think (aim, dream – make your own choice) big. If you've dreamed big but have yet to achieve your goals, try to think even bigger. The dreamer takes it all. These are the platitudes that are abundant in social media. However, in 2009, Lisa D. Ordóñez, Maurice E. Schweitzer, Adam D. Galinsky, and Max H. Bazerman published a scientific article titled "Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal Setting." They summarized data from numerous studies on the "dark side" of goal setting. Below, I will present the key findings from the article. They all point out that "inspirational goal setting" is not as safe for business as you might think. Dark sides of big goals “Never give up. Disgrace yourself till the end.” Unknown author A quote from the earlier referenced article: “We describe how the use of goal setting can degrade employee performance, shift focus away from important but nonspecified goals, harm interpersonal relationships, corrode organizational culture, and motivate risky and unethical behaviors. We argue that, in many situations, the damaging effects of goal setting outweigh its benefits.” When people have goals, they narrow their focus, sometimes reducing it to tunnel vision. Like Gollum, a character from Tolkien's books obsessed with his “precious,” they may not notice other important aspects of the task. You may have watched a famous video by D.J. Simons and C.F. Chabris, in which two groups of players pass basketballs. One group wears white shirts, and the other wears dark shirts. Researchers asked participants to count how many basketball passes the white team made. Most participants completed the task. But they all failed to spot a man wearing a black gorilla suit who entered the scene, pounded his chest, and walked away. When you are working hard and being focused on your goals, a few gorillas may be dancing around you, completely unnoticed. Executives obsessed with a quarterly profit target often fail to consider customer needs. In a 1990 study, Staw and Boettger asked students to proofread a paragraph containing grammatical and content errors. The students who were told to “do their best” were more likely to correct both grammatical and content errors. Those explicitly instructed to correct grammar or content concentrated only on the specific task, ignoring other problems in the sample text. Students who didn’t have a clear objective delivered more value with their work. Oops. If you assign your employees a task to increase quarterly revenue, don’t be surprised if they ignore customers or coworkers. Focusing on one problem always comes at the expense of others. Shah, Friedman, and Kruglanski (2002) proved that individuals with multiple targets tend to focus only on one of them at a time. Gilliland and Landis (1992) gave participants quality and quantity goals. When the goals were challenging, participants concentrated on the quantity ones. Paraphrasing a phrase attributed to Drucker, only what gets measured gets understood. If you ask a sales rep to sell twice as many product units as they did a year ago and want them to take good care of the customers, they will prioritize the quantity target. Goals that emphasize immediate performance, such as quarterly profits, force executives to engage in short-term behavior that harms the organization in the long run. So, if you have a great strategy but push your team to hit the targets every quarter, the long-term aspirations will be neglected. Some business leaders love challenging objectives or the so-called ‘stretch goals,' aka BHAGs. However, researchers found that setting stretch goals doesn’t go without negative implications, such as: Taking too much risk. People who have specific, challenging goals tend to adopt riskier strategies. Unethical behavior. The Ford Pinto case is a good example. The authors assert that "aggressive goal setting within an organization will foster an organizational climate ripe for unethical behavior. That is, not only does goal setting directly motivate unethical behavior, but its introduction may also motivate unethical behavior indirectly by subtly altering an organization’s culture.” Goals also affect learning. When employees have a challenging goal, it may inhibit learning from experience and degrade performance. Individuals with a specific target will be less likely to try alternative tools and methods. Such goals aren’t as much a ‘stretch' as you may think. Ambitious goals also degrade intrinsic motivation by replacing it with external stimuli. Just like people hooked on drugs forget how to enjoy themselves without them, employees become totally dependent on a big external goal. Stretch goals may not be achieved. If your staff fails to meet lofty targets several times, it damages their belief in the company. Paraphrasing an old saying, assumption is the mother and father of all mistakes. Experts advise setting ‘achievable’ objectives. However, no theoretical tool can help you test their feasibility in the real world. Each ambitious aim is somebody’s dream. Another study from the world of sports called "The performance and psychological effects of goal setting in sport: A systematic review and meta-analysis" arrives at an interesting conclusion: “Process goals and performance goals produced significant improvements in performance, but process goals elicited significantly greater improvements than performance goals. Conversely, no significant performance improvements were found by setting mastery, outcome, or ego goals” (source). So, when an athlete focuses on the process, it yields better results than concentration on outcomes, no matter how counter-intuitive it may seem. I believe this principle also works in the business environment. Do we need goals? One may use a knife to cook dinner or to commit a crime. Taken by themselves, goals are neither good nor bad. We must be ambitious to change the world. And I am far from claiming that we don’t need aspirational goals to build a great company. But I’m convinced that strategic thinking is not a magic triad “goals – decisions – actions.” Strategy is not what lies between us and our ambitions. Successful entrepreneurs I’ve met in my life didn’t start with goals. They spotted the opportunities and were ambitious enough to seize them. And then they achieved incredible results, though many confessed that they didn’t plan it at first. They saw a chance and used it. Recognizing the opportunities and the bravery to use them are more important than goals. The more we believe in a goal, the less critically we view it. As Nassim Nicholas Taleb’s “Black Swan Theory” states, the absence of evidence to the contrary does not prove the infallibility of a theory. Just because we don't see reasons not to reach our goals doesn’t mean they don’t exist. Contemplation questions – Are there too many mid- and long-term goals for your team? – What if you dropped some goals? Would it negatively impact your team's performance? – Would business results worsen if you replace some mid-term goals with longer-term ones? – Would work quality decline if you set only a few goals per employee and discuss other requirements verbally? Chapter 7. Strategy and Trees On October 24, 2010, Steve Jobs sent a very important email. It contained the agenda for Apple’s upcoming “Top 100” retreat, a top-secret offsite management meeting. Let’s look at Jobs’s part of the agenda: “2011 strategy – SJ • Who are we? • What do we do? • Post PC era • 2011: Holy War with Google • 2011: Year of the Cloud • 2015: New Campus” Pay attention to some interesting details. It looks like a set of strategic premises for only one year – 2011. A strategy for one year? It may seem absurd. No BHAGs, bold visions, or big dreams. The only point related to the distant future is #3, “Post PC era.” But this is not a goal; it's a trend Steve Jobs wanted Apple to capitalize on. Steve Jobs focuses the team's attention on the products and solutions the company needs to fit into this future: “Holy War with Google” and “Year of the Cloud.” It doesn’t look like a bold strategic vision you’ve read about in books. But, as we know now, it worked out. Steve Jobs didn’t set an audacious goal. • He pointed out the direction. • He inspired his people to focus on products that could propel the company in that direction. The past exists only in our memory. The future exists only in our imagination. We can only focus on where we live – the here and now. That’s the approach to business strategy that we could learn a lot from. Business as relationships The classical strategy theory implies that we should set an aspirational goal and find a path to it. Hence, strategy is a means to an end. I don’t claim the theory is wrong, though statistics show this avenue isn’t that promising. For instance, only 2% of leaders are confident they will achieve 80–100% of their strategic objectives. Most strategies fail, and we should consider changing our approach to long-term thinking. And the fact that we live in a world filled with mediocre products and pathetic services is the best proof of that. Business is about value exchange, that is, about relationships between people: – Between co-founders – Between business leaders and employees – Between employees and customers – Between you and your suppliers and contractors – Between your business and society. And the quality of these relationships determines their success, not the boldness of your goals. Do you often start new relationships by making it clear that your sole goal is your own prosperity, and you want to use the other part only as a resource to achieve it? The relationship’s stability depends as much on what you give as on what you receive. The strategy shouldn’t be a set of selfish goals. It’s about creating conditions in which they are naturally reached. Strategy and trees Imagine you own a house in a hot country. The sun shines into your living room and heats it up throughout the day. You decide to plant a tree to protect you from the sun's rays. The tree should be 3 meters (or 10 feet) high. You buy a book about trees and select a species. You also learn that it takes the tree three years to grow as high as you need. So, you have a specified strategic goal – to have a three-meter tree in three years. You build a plan for where to buy a seedling and how to plant it. If you invite a big consulting firm, it will also provide you with data on how people in various countries grow trees and how your neighbor did so a year ago. You start implementing your strategy. You plant and take care of the tree: water and protect it. But things never go as planned. Sudden cold snaps threaten to kill your tree, and little rodents try to eat it. Every tree, like every human being, grows at its own pace. So, quite soon, you realize that your tree isn’t as tall or straight as you expected. If you're the type with super straightforward strategic thinking, you'll start figuring out how to make your tree grow faster. For example, you might build a tall structure with a rope to pull the tree up towards its strategic goal. Moreover, your investors may force you to do so because they expect fast growth. But you can choose another approach. You can embrace that you can’t influence all the factors affecting how fast your tree grows. You can do your best to foster growth and create the best conditions, but don't worry too much if your tree isn't tall enough. We often imagine business leaders as demigods, masterfully deciding their companies' destinies. But ask a retail chain CEO about the mood among the cashiers, and she’ll have no clue. Ask her how products are supposed to be shelved, and she'll be in the dark. We don't know how trees grow and have little influence on the process. Let's be honest, CEOs also don't know how every cog in their machines works, and their influence on them is limited. Businesses are like trees. They don’t always grow as planned. All we can do is to create the best conditions for growth. The belief that a CEO can set a goal and navigate their company to it like a ship through the ocean is merely a fantasy created by academics or business consultants without hands-on managerial experience. Strategy as creating conditions “The important thing is not what we achieve but what we become in the process of achieving it.” Mahatma Gandhi The purpose of a CEO is not success. Their purpose is to create conditions in which success is the natural outcome. Apple establishes conditions in which thousands of its employees are willing to work hard, and dozens of suppliers and distributors are eager to cooperate. It creates conditions in which Apple builds products millions want to buy. And that makes it successful. Conditions first, success second. Peter Drucker says: “The single most important thing to remember about any enterprise is that results exist only on the outside. The result of a business is a satisfied customer. The result of a hospital is a satisfied patient. The result of a school is a student who has learned something and puts it to work ten years later. Inside an enterprise, there are only costs.” (source) “The purpose of a business is to create a customer.” (source) Strategy is not about finding a battlefield where you can win because business isn’t war. It isn’t even about establishing your own battlefield. It is about creating customers who are willing to pay the asking price for our product because it meets their needs better than the alternatives. Steve Jobs said, “Manage the top line: your strategy, your people, and your products, and the bottom line will follow.” When we set a long-term goal based on profit or market value first, we put the cart—our success—before the horse or sources of this success. We should concentrate on what we do now, and it will lead us to outstanding results. Aristotle said: “We are what we repeatedly do. Excellence, then, is not an act but a habit.” Strategy is also a path of cognition and learning. It's not so important whether you achieve strategic goals. What's essential is what you and your team learn along the way. Contemplation Questions – Is your strategy based on opportunities you see in the external environment? – Are you creating conditions in which your business can succeed? – What are these conditions? – What else can you do to make your business more successful? – Do all stakeholders have the opportunity to contribute maximally to the company's success? Chapter 8. What is strategy? Strategy as a mission “Goals – decisions – actions” is the triad that has become an axiom over the years. However, no scientific study directly indicates that this way of thinking is more effective than others. The "mission – purpose – action" scheme might be an alternative. Many great people, like Martin Luther King Jr., Mother Teresa, Nelson Mandela, and Mahatma Gandhi, never mentioned SMART goals in their speeches. Instead, each of them had a mission or calling and followed it to the end of their lives. What makes us think that we should act differently in business? I don’t proclaim that business leaders should save the world for free. Shareholders, business owners, and employees are stakeholders and should get what they deserve. If a business prospers by satisfying the needs of the six stakeholder groups, setting goals in favor of only one of them – shareholders – is illogical. I am also quite skeptical about the classical "goals – visions – strategy" top-down approach. I am far from claiming it is wrong, but I believe it is not the only one. We can also start from smaller things – like our capabilities or customers' needs – and unfold the strategy based on these revelations. We can set goals later. Moreover, most entrepreneurs I've ever met started their businesses this way. They noticed an unmet need and created value to fulfill it. Michael Dell offered customers cheap computers and fast, convenient service. Travis Kalanick offered riders a convenient mobile app. Ingvar Kamprad offered consumers cheap furniture. Why should businesses change their strategic approach when they become mature and hire MBA graduates? The "goals – visions – strategy" idea dominates in strategic management literature and has become a cliché that executives follow without even considering it. But nature did not give us a mind to blindly follow clichés. Just because many people use a concept or tool doesn't make them perfect. Think about it – how many traditional strategies have actually been successful? I suggest an alternative approach to business strategy. What does strategy mean? Every business is an ecosystem embedded in two higher-tier ecosystems – market and society. Business success depends on the company's ability to create value for the six stakeholder groups. Leadership in any company should create, maintain, and develop this ability by managing the six Value Waves, the six sets of workflows that provide value for stakeholders. As such, Value Waves Management is a major management task. The primary objective of any business is building a great company by maximizing stakeholder value and striking a balance between various and sometimes conflicting stakeholder interests. We should switch our attention from selfish short-term goals such as profit, EBITDA, or market capitalization to establishing conditions under which profitability and market value growth become the natural outcomes of our efforts. It happens when we deliver so much value for our customers that they prefer our products over those of our competitors. And if we provide sufficient value for other stakeholders, they will support our efforts to build customer value. Sales and profit are the outcomes of your actions. Focus on actions, and the result will follow. You are part of the value marketplace. Is your offer attractive for all sides? Strategy and goals We can painlessly replace long-term goals and visions with: • Mission as the reason why we run our enterprise. • Purpose as a direction in which we would like to develop. A purpose statement should answer three questions: • Who, broadly speaking, will be our core market, and why? • What, broadly speaking, will we offer our customers? • How, broadly speaking, will we operate? Of course, we may set many goals and objectives. But since they concern the unknown future, we shouldn’t treat them as obligations or promises that must be kept at any cost. If we realize that we can't reach our goal halfway through, we shouldn't consider it a crime or betrayal. If a business doesn’t hit its targets, it’s not a tragedy. But if it loses its focus on customers and other stakeholders, it won’t live long. We should use goals and objectives mainly to achieve agreement among all the team members, from the board of directors to the front-line employees. We sit down and agree on what we will and won’t do. But we should remember that setting goals implies squeezing a non-linear, continuous, ever-changing, chaotic world into our numerical, discrete, linear, and rigid objectives. When we start a strategy by setting goals, we unintentionally begin to tailor the task to fit the answer. We see the world distortedly through the lens of our selfish objectives. We must measure our success by stakeholder value, not shareholder value. We need to know at every moment how much value our organization creates for all stakeholders. Customers don’t care about our quarterly EBITDA. We should stop pretending to care about our customers and business partners while tracking only financial results. We must stop crossing our fingers when we proclaim that the customer is a king or queen for us. We should consider strategy as a set of actions to maximize stakeholder value. We shouldn't just play to win because winning means hitting a particular target in a specific time frame. We also have to win to play and stay in the game for decades. Strategy development and execution is a false dichotomy. We need some time for strategic thinking and a lot of time for strategic acting. But we don't stop thinking while acting. Our business planning can be relatively short-term. The maximum planning horizon is determined by the payback periods of our most important projects. If it takes us three years to build a plant, planning for just 12 months is risky. However, an annual rolling plan may be enough if we're not launching large-scale projects (remember Steve Jobs's '2011 strategy'). Strategy as constitution A country's constitution is not the only law in the state. However, any other law must conform to it. A company's strategy isn't the only rule in the company, but any decision made in the business must be in accordance with it. Strategy is a company's constitution, a set of central principles that guide managers across all levels when making lower-tier decisions. Central principles reflect the approaches we use and the tools we deploy to create value for stakeholders. First and foremost, central principles address the following questions: 1. Which types and segments of customers are a priority for us? 2. Which of their needs do we address first? 3. What customer values do we create to meet these needs? Which products are, therefore, a priority for us? 4. What is our policy regarding hiring and staff development? 5. What corporate culture do we aspire to? 6. How do we regard product quality? What is our priority – high quality or low cost? 7. How do we manage costs? 8. What do we primarily invest in? 9. How do we work with business partners? 10. What contribution do we want to make to societal development? As we will discuss in the next chapter, you can't develop these central principles as soon as you start working on your strategy in many cases. But sooner or later, you'll have to do it. You can add to the list or create your own. From my experience, the initial version of the list is constantly refined and expanded as the strategy is implemented. The list should be concise yet comprehensive enough for every manager in the company to develop criteria for the correctness of their decisions based on it. Strategy is not a set of traffic rules or a military code. It is a collection of principles that help employees understand which of their decisions are right and which are not. We also need to divide our Value Waves and their individual components into three groups: 1. Processes that will not undergo significant changes during strategy implementation. These should be automated and systematized first and foremost and can be monitored using KPIs. 2. Processes that will constantly change – we will set hypotheses, some of which will be confirmed, others not. Such processes cannot be automated or bureaucratized; KPIs are not suitable for monitoring them, and they require a creative approach. 3. Processes that we will methodically improve year after year, regardless of today's short-term goals. For example, this could involve developing a corporate culture or IT systems, building a distribution network, or enhancing specific competencies. This will help us prioritize even if we use fairly short-term planning. The definition of strategy Strategy is a set of short- and medium-term plans to maximize the value for all stakeholders. These plans are designed so that their implementation will lead to the company's development in the specified direction (purpose statement) and at the chosen pace. Implementing these plans should allow the company to build a business that is resilient to external changes and focused on long-term sustainability and growth. Strategy is a set of answers to the question: "What problem should we solve, and why?" It is a number of projects on enhancing Value Waves. For instance, a software manufacturer’s strategy might look like this: ● Our strategic goal is to build a great company that will outlive its founders (a broad goal). ● We will do this by creating unique supply chain management solutions for B2B businesses around the globe that will help them become more efficient in sales and procurement management. Our solutions will also make their employees' work easier and help business owners expand their companies faster (a purpose statement). ● We will grow at least 15% faster than the industry (development rate). ● We will treat all stakeholders equally. We will regularly measure our success by their satisfaction and take action to maximize this satisfaction. ● Our central strategic principles as of today are X, Y, and Z. Our managers follow them when making decisions, and we constantly develop these principles. ● The key strategic problems we should solve are A, B, and C. Our most critical Value Waves to improve are D, E, and F. ● We base our strategy on a deep understanding of customer needs. We’ve conducted extensive consumer research and know precisely their pains and expectations. ● Our medium-term goals, objectives, core customer groups, target markets, KPIs, OKRs, and to-do plans are… Can this strategy be more specific about market niches, geographical zones, products, prices, and policies? Sure, it can. In some cases, it is necessary. But we should keep in mind the cost of focused strategies. Focus provides concentration but also implies closing all the other doors. We will dive deeper into this issue in the next chapter. Some strategy experts like to share stories of companies that thrived by concentrating on a single idea: 1. Southwest Airlines and Ryanair – affordable air travel, 2. IKEA – affordable furniture, 3. Lush – fresh hand-made cosmetics, 4. Airbnb – apartment rentals. But these stories oversimplify these companies' long and winding journeys to success. Moreover, faced with competition, even highly focused companies have to pivot. What are Apple, Alphabet, Amazon, Meta, Walmart, P&G, NVIDIA, or Samsung focused on? Strategy implies constantly scanning the horizon in search of new opportunities. By opportunities, I mean customers willing to pay for a better task solution. Beware of the person who sells you a book with only one page. Since I read blog posts, articles, and books on strategy regularly, I often see three mainstream topics in them: 1. Strategy is complicated. Proponents of this idea overwhelm you with statistics, threats of the ‘rapidly changing world,’ or the alleged complexity of strategic decisions. 2. Strategy is very simple. The high priests of this religion oversimplify the concept and reduce it to ‘three simple steps’ or a colorful framework. 3. Both groups portray strategic planning as a separate activity that we should attend once a year. But strategy means doing business tomorrow better than you did yesterday. Look for ways to satisfy your stakeholders' needs and deliver more value for them than others; success will not keep you waiting. Contemplating Questions: – What is your mission? – What is your purpose statement? – Which core principles can you articulate right now, and which requires more time? – Does your strategy fulfill its main task of setting principles for making any decisions? – Is your strategy aimed at creating value for all stakeholders or only some of them? Chapter 9. Red and Yellow strategies In 1889, a man named Fusajirō Yamauchi made a living selling Hanafuda in Kyoto, Japan. Hanafuda is a type of Japanese playing card, and the word' Hanafuda' is translated as 'flower cards.' Yamauchi made them by hand and sold them in his small store, Nintendo Koppai. That's how Nintendo's history began. The company started making toys, arcade machines, and electronic games in the 1970s. In 1865, another story began in Finland. The mining engineer Fredrik Idestam established a groundwood pulp mill in Tampere. In 1868, he built a second mill near the town of Nokia – the name under which we know the company today. There was a time when the Nokia Company sold toilet paper. It has undergone many transformations in its history. It has manufactured paper items, car tires, rubber boots, communications cables, televisions, personal computers, generators, capacitors, military equipment, plastics, aluminum, and chemicals. And then it focused on mobile phones. Sometimes, companies change their strategies radically. Bricks and computer programs One of my LinkedIn connections, Alex M H Smith, used the phrase ‘to put a flag in the sand’ when answering my comment. He meant that we should make a strategic choice, no matter how difficult, and then move in the selected direction. In some cases, this is the best approach – but not always. Imagine you’re the CEO of a big plant. It manufactures bricks and nothing else but bricks. You can choose any strategy, but producing and selling bricks will most likely be its linchpin. Your bricks can be cheap or made of gold. However, you will utilize your primary asset – the plant – and sell bricks to those who need them. Expressed in the language of social media gurus, you will have to 'niche down.' But imagine you're the CEO of a medium-sized software development company. Your primary asset is your team's competencies and skills. They can develop various types of software. Would you need to ‘niche down?’ Not necessarily. At times, it makes sense to delve into a narrow market segment and become a leader there. But sometimes, you should keep multiple options open. Some may claim that selecting the latter means not having a strategy. You don't have a clear SMART goal. You can't focus on a specific direction and allocate resources appropriately. However, it can be your strategy, too. Strategy as a half-baked plan Another quote from my LinkedIn feed reflected the widely accepted view of strategy: "The strategic choices made in a boardroom should revolve around what businesses do we want to be in, where do we compete (customers, products, channels, geographies…), and how do we compete. These things will not change all the time or on a daily basis. There‘s a clear set of strategic choices that have to be made." According to the statement, we can divide strategizing into two phases: 1. Making major strategic decisions 2. Implementing them For instance, if you sell cookies, you should first decide what cookies you'll sell, to whom, where, for how much, and through which distribution channels, and only then can you start acting. But think for a second: under what conditions can we make all decisions about customers, products, channels, geographies, and competitive advantage in advance? We can do it only if we know for sure or at least are very confident that these decisions will lead us to success. Ask yourself: under what conditions can we be so confident? I see only two options: 1. We have already done it in the past. We have worked with these customers and sold them these products in those regions. So, our strategy actually implies doing 'business as usual.' 2. We haven't done it before, but we have done our homework. We've researched customers, built prototypes, tried selling them in different regions, etc.. So, if you are a CEO who believes you need a new strategy, you will actually go through four phases, not two: 1. Building hypotheses about possible markets, customers, products, etc. 2. Testing the hypotheses until you find the one that meets your strategic aspirations. 3. Making major strategic decisions. 4. Implementing them. Between the moment you realize that you need a new strategy and the moment you have it, there are months or even years of groundwork. In his book Playing to Win: How Strategy Really Works, Roger Martin describes this work as an extensive analytical exercise. But it is worth mentioning that the book is about the Procter & Gamble story. P&G is a large company whose gross profit in 2023 was more than $42 billion. Do you have so much time and resources for groundwork? A sum that might seem like a rounding error to P&G could equal someone's annual revenue. Big consulting firms also use this approach. They analyze tons of data in search of the answers to the two questions from Roger Martin's book: "Where to play?" and "How to win?" At the end of the day, they come back with a detailed strategic plan that your board of directors can read, assess, and vote for. I don't claim this approach is wrong. But you should keep two considerations in mind: 1. This work is very expensive, which is why the fees of big consulting firms are so high. Few businesses can afford it. 2. There is no reliable evidence that this approach is more efficient than others or that big consulting firms don't make huge mistakes. The analytical approach has a severe flaw: it bases future forecasts on past data because there are no facts about the future. But the future isn't a linear continuation of the past. Statistics tell you what worked well yesterday, but stay silent about what will work tomorrow. I believe that we can, when necessary, integrate all four aforementioned phases into one, allowing strategy development and implementation to go simultaneously – as counterintuitive as that may sound. We can choose between two approaches to strategy. I call them the red strategy and the yellow strategy. The choice depends on two factors: 1) The length of the product's lifecycle in the market 2) Your willingness to diversify your business Red strategy The product lifecycle is the time span from when a product enters the market to when it leaves or changes significantly. For instance, bricks have a very long lifecycle. They were invented centuries ago, and many construction companies still use them. So, if you're the CEO of an organization that produces bricks or other long-lifecycle products, and you don’t have plans on diversifying your business, a red strategy is a perfect choice for you. A red strategy is a classical ‘goals – decisions – actions’ strategy based on market research and evidence. You analyze the market, weigh the alternatives, choose a path, and make long-term action plans. Your strategy may look like a Gantt chart containing a set of meticulously elaborated projects. However, this doesn't mean you have carved your plans in stone and are not ready to adjust them if necessary. But you 'put a flag in the sand' and build a list of the well-calculated actions to reach the goal. Your priority Value Waves (business processes) might be: Operational efficiency Distribution Branding Sales You use KPIs, frame your staff compensation packages against measurable results, and foster a culture of discipline and operational efficiency. The red strategy involves having clear answers to 24 main questions, which you can find in Appendix 2 of the book. It is advisable to answer all these questions before implementing the strategy. The list of answers should not be revised without serious reasons. Yellow strategy – strong strategy loosely held If you are, say, a software development company, you can also employ the red strategy approach. However, software's lifecycle is relatively short. If you're ready to change the market niche or even the industry when you spot a great opportunity, the yellow strategy avenue may be a better option. Your strategy may also look like a list of initiatives, but you keep many doors open. You encourage your team to find new opportunities and are willing to adapt the project list if they do. You adhere to a specific strategic direction but remain flexible regarding products and projects. Your strategy is built around your core competencies and culture. Your goal isn't to choose a market and achieve leadership in it but to create a new market or category. Your priority Value Waves might be: Category creation Product development Developing teamwork Developing a culture of cross-functional interaction Developing the skill of working in agile teams Fostering an innovative culture Rapid hypothesis testing Quick product launch to market Customer research You rely on OKRs rather than KPIs. You encourage innovation and create a culture where the ability to generate new ideas is highly valued. You don't limit yourself to a particular market niche, customer segment, or product. You have a mission and a purpose as broadly defined directions for development, and you freely navigate within them, constantly seeking new growth opportunities. The only things that never change in your strategy are mission, purpose, and culture. You can alter any other aspect of your business if a new opportunity requires it. Your list of Central principles is shorter and less detailed. In the Yellow strategy, you still need to manage the six Value Waves, although this approach makes the task more challenging. The yellow strategy involves seeking answers to 18 key questions, which are included in Appendix 2 of the book. However, the search for answers and their refinement often continue during the implementation process. Some experts call it an 'opportunistic strategy' and criticize it for lacking focus. But I insist that, in some cases, it is the only option. Before we dive into detail, I would like to cite Richard Rumelt's book Good Strategy/Bad Strategy: The Difference and Why It Matters. In it, Rumelt recalls his conversation with Steve Jobs in 1998, long before iPhone and iPad emerged. Rumelt asked Jobs: "What are you trying to do in the longer term? What is the strategy?" Steve Jobs just smiled and said, "I am going to wait for the next big thing." It didn't look like a flag in the sand. Yellow Bricks and Yellow Strategy: Inevitably Choosing the Yellow Strategy What would you say if you saw a CEO's schedule for a day that looked like this: 9 am – 12 pm: Budget committee meeting 12 pm – 1 pm: Lunch with the board chair 1 pm – 3 pm: Come up with a disruptive product 3 pm – 5 pm: Create a groundbreaking business model It looks absurd, but it is what some strategic advice appears to be. According to it, you must envision a new product or business model, create a new category, and disrupt your marketfirst, and only then can you devise your strategy. The problem, however, is that great ideas don't punch the clock. Steve Jobs returned to Apple in 1997, but at the time, he didn't have the iPod or iPhone in mind. The company started developing the iPod, the first device that made it great again, only in 2001. He waited for the 'next big thing' for over three years. Imagine you become the new CEO of a brickmaker. The board expects you to devise a strategy to return the business to growth. As you take office, you find out that the market stagnates, and so does your business. Companies in the market sell almost identical bricks at comparable prices. Clients don't see much difference between products from various plants. A discount is the only argument for sales reps to close deals. You gather your team in the conference room and brainstorm, but they have no promising disruptive ideas. You benchmark your company against similar ones in other countries and discover that all the brickmakers across the globe have similar troubles. You invite consultants, brainstorm again, send your team members to different countries in search of fresh ideas, and research some related industries. And finally, you have a list of ideas that may make or break your future. Is this the time to 'put a flag in the sand?' Not at all. All you have is a list of untested, shaky hypotheses and ideas no one in the world has ever tried before. Some hypotheses are quickly testable, and some are not. Finding a gem in this list may take months or even years. Or you may not find it at all, and you'll have to start from scratch. You have two options. The first option is to put your strategy off until you check all hypotheses and find a place to put your flag. This is the alternative consultants don't like to discuss because it's a job killer for them. By the way, big consulting firms are unlikely to help you in such a situation. They are used to building their reasoning on hard evidence – market research, benchmarks, and trends. However, if you make an innovative product or business model, there is no hard evidence of its viability. Trends also rarely go as predicted. Find some old Gartner's forecasts on the Internet and see for yourself. The second option is to embrace a type of strategy called a yellow strategy, in which hypothesizing and testing hypotheses is a primary strategic activity. Strategy as continuous hypotheses testing "The essence of strategy is choosing what not to do." Michael Porter Many experts will tell you that this is a risky strategy. They will say you need focus. They will insist that you won't be able to allocate resources without clear goals and action plans. They'll assert that such a strategy will disorient your team. And there will be a lot of truth in their words. But let's look at the alternative approach or focused strategy. Is it less risky? I doubt that. First, you can put the flag in the wrong place. In early 2024, Apple shuttered its driverless car project, the Titan Project, which it had developed for over ten years. Rumors are that Apple wrote off a whopping $10 billion in loss. Apple could afford such an expensive experiment, but could you? Business media worships entrepreneurs who made a big bet on one idea and won. But let's remember that for every successful entrepreneur, there are dozens of those who also made big bets and lost. Second, when you motivate your team to focus on one strategic idea, you make them deaf to other ideas. In 1973, two Princeton University psychologists, John Darley and Daniel Batson, conducted an experiment. They surveyed 40 trainee Catholic priests about their motivations for entering the church. The surveys revealed whether the students were motivated by helping others or ensuring their own salvation. Then, the psychologists asked the priests to give a five-minute talk on a specific topic. They sent the students to another building a few minutes away. They also told the students how much time they had. A third of the students were told that they were already late, another third were told to go right over, and the final third were informed they had a few minutes. They passed an actor acting distressed along the way. He was slumped with his eyes closed in a doorway, grumbling. Overall, 40% of the participants stopped to help. However, a mere 10% of those who thought they were late stopped, compared to 45% in the intermediate condition and 63% of those who thought they had a few minutes. The personality metric had minimal impact. The rushing priests simply didn't notice the actor. Social psychologists know that external conditions determine our behavior much more than we believe. Our brains are imperfect computing machines. When focused on one important task, they ignore or don't simply notice everything else. Rally your team around one strategic idea, and all other ideas will be forgotten forever. A classical or focused strategy is also risky, and no evidence indicates that this approach is more efficient, even though thousands of experts believe so. Just because everyone believes something, it isn't necessarily true. The classical approach is logical and works in many cases, but that doesn't mean we must follow it in any situation. Red and yellow strategies The red strategy is not an old-fashioned, rigid, or obsolete approach. The yellow strategy is not a modern, ‘agile,’ or advanced avenue. We need to choose the path appropriate to our situation and vision. If you select the red strategy, you opt for incremental development. Your key processes, technologies, and products evolve progressively, according to the plan. If you vote for the yellow philosophy, the only things that will remain untouched will be your mission, purpose statement, and culture. You can adjust all the rest if necessary. Some companies combine the two approaches. For instance, 40 years ago, Nestle had a well-established red strategy, which made the company successful. But there was a particular unit inside the business, a squad of bold innovators who came up with what later became Nespresso – a revolutionary way of home coffee making. Developing the technology behind Nespresso machines took almost ten years. Nestle leaders didn’t have a Gantt chart for the project. It was a thorny path of experiments, failures, and mistakes—a great example of the "yellow" strategy. But it led to the creation of a global brand. Having the yellow strategy doesn’t equal not having a strategy at all. By choosing this approach, we select a general direction of development but stay flexible in what we do to move in that direction. Large businesses with capital-intensive fixed assets such as plants, ship fleets, or planes must carefully weigh the potential negative consequences before choosing a yellow strategy approach. But young, nimble companies free of heavy machinery or fleets can take advantage of this approach. The yellow strategy implies constant learning. Learning is more important than achievements. When you reach a goal, it's a reason to celebrate. When you learn something new, it gives you a chance to reach more goals in the future. You can also choose the yellow strategy just as a temporary solution. As soon as you find a place to put your flag, you may turn to the red one. The yellow strategy is tough to manage. Doing everything at the same time means doing nothing. You need to ensure your strategy doesn't turn into a bunch of unrelated projects and initiatives that don't lead to a common goal. The red and yellow strategies concept isn’t yet another 2*2 matrix or a framework. It is, rather, a philosophy that can help you choose a path that fits your current situation and your vision. Contemplation questions: – Which strategy suits your company better – red or yellow? – What factors should be considered when choosing the "color" of your strategy? – Do you know exactly which decisions, products, and markets your strategy should focus on? – How do you keep the team from losing focus if you choose a yellow strategy? – Can you combine red and yellow strategies? Chapter 10. What is NOT a strategy? “Profit for a company is like oxygen for a person. If you don't have enough of it, you're out of the game. But if you think your life is about breathing, you're really missing something.” Peter Drucker Bloodletting was an extremely inefficient and dangerous procedure that medical doctors used to treat most diseases until the end of the 19th century. They believed that some diseases caused human bodies to produce too much blood. Most doctors knew it did much more harm than good, but they still employed the method. Why? They didn’t have a better tool. Thomas Kuhn, a historian of science, pointed out that scientific theories never fail under the weight of their errors. They disappear only when new, more effective theories emerge. Medical doctors believed in bloodletting for over 2000 years until scientists developed more effective approaches. I am in no way claiming that the classical strategy theory is as harmful to businesses as bloodletting is to bodies. But the basics of business strategy were formulated in the mid-60s and haven’t advanced significantly since then. Many brilliant minds have developed numerous new strategic tools. However, the fundamental principles such as shareholder value primacy and 'me-strategy' are still around. Overlooked ideas Why are some small startups more innovative than big companies? Because they view the world from another angle. A few years ago, my former employee called me for advice. He had started a business and wanted to craft a winning strategy. He told me he had already set a bold goal for the team – to quadruple his young company in three years. I advised him not to start with goals but to scan the horizon in search of opportunities first. He rejected the advice as he believed it could bring only mediocre ideas for slow, incremental growth. "I need a breakthrough," he said firmly. "Breakthrough always begins with big goals." Three years later, I bumped into him at a conference. He told me his business had closed its doors. His team devised a strategy primarily consisting of copying the steps of the major competitors. "We also considered some other alternatives," he said, "But they didn't seem very promising." He told me that a year after our aforementioned phone call, a little-known young startup had used one of the ideas that he rejected and disrupted the industry. Big companies managed to adapt because they had almost unlimited resources, but my friend's business didn't. Many businesspeople believe that setting bold goals for a team can unleash its creativity and force them to think outside the box. At times, it works very well. But sometimes, it backfires. When you set a stretch goal for your team, you unintentionally activate two mental filters in their minds. The first one filters out non-obvious, questionable, and doubtful hypotheses because they are less likely to catapult the business. So, the team builds a short list of obvious ideas. The second one takes this short list and filters out the most challenging ideas because our brain hates to spend energy. Imagine it is 2009. A cab company owner sets a new goal for their team – to triple the revenue in three years. The team brainstorms and proposes three ideas: 1. To acquire a few competitors. 2. To reduce service prices dramatically and steal competitors' customers, hoping to raise prices later and recoup losses. 3. To create a mobile app that will connect passengers with drivers. What do you think are the chances they will vote for the third option? Large companies must grow quarter after quarter because their investors want them to do so. As they are already big, they need initiatives with significant growth potential. Their executives are primed by this requirement and may overlook some non-obvious ideas. But small startups are free from such limitations. They may play with ideas they love and sometimes find gold their gigantic rivals have overlooked. When you start strategizing with a bold goal and vision, we fit your task to the answer. Your success depends on your ability to discern unique opportunities rather than your ambitions. Strategy and design thinking "At the heart of a strategy is an approach for achieving your chosen objectives and overcoming the challenges associated with it." This is another quote from my LinkedIn feed. Who said that? What's the proof? Who made this an axiom? All successful people are ambitious, but not all ambitious people are successful. This is a cognitive bias called false causation. Most startup founders dream about taking on the world, setting bold objectives, and thinking big, but statistics say up to 90% of them fail. When I help companies craft strategies, I never start with audacious goals. I invite them to use design thinking tools to delve deeply into customer experience. We try to learn as much as possible about how customers live and work, about their problems and difficulties. It brings us insights and strategic hypotheses. We also gather and analyze some data on the market, competitors, and trends, but that's not our primary source of inspiration. The main source of inspiration should be the same as the source of income – the consumers. Only then, when we have a number of plausible hypotheses, do we start thinking about goals and objectives. Strategy Isn't a Google Maps Route Many executives waste their precious time year after year analyzing point A – to build a plan to get to point B. What’s wrong with point A? When you set the route to your cousin's house, you believe the landscape won’t change. The highway you are supposed to take won’t change its mind and turn right instead of left. The mountains and rivers will be precisely where they are on the map. However, every business is a value ecosystem incorporated in two higher-tier ecosystems – market and society. The difference between an ecosystem and a map is that the former is constantly changing, which causes four problems. 1. There is no point A. It is only a snapshot, a static image of the highly dynamic system. 2. When you analyze point A, you see the current state of the system that reflects the decisions made months ago. For instance, you see products your competitors developed years ago and offer today. But you can’t see their pipeline and don’t know what they pull out of their hats tomorrow. 3. Setting the route is impossible if the starting point constantly changes. 4. The development of systems is non-linear. Knowing much about point A won’t help us understand point B. Read old forecasts of reputable analysts, and you’ll see how often they make mistakes. Plotting routes from A to B in such conditions is like planning a wedding ceremony for your kids when you're not even married yet. Market analysis and 'industry maps' are a waste of time. It tells you a lot about our competitors' past decisions and little about what you should do to change your market position. SWOT analysis is a waste of time. Discussing your strengths and weaknesses is an exchange of opinions about what you're good at and weak at. Comparing ourselves with competitors is a waste of time because it won’t help you create groundbreaking products. Analyzing point A can be useful for assessing resources for development. However, doing this on a more focused, short-term level is better. There are always more resources than we can utilize. Customer-free strategy Look at the most popular strategic frameworks, such as SWOT analysis, BCG matrix, PESTLE, Porter’s Five Forces, Porter’s Generic strategies, Strategy palette, etc. What do all of them have in common? You won’t find the word ‘customer’ in these matrixe, and models. It's obvious that consumers are implied somewhere under the words 'opportunity' or 'market force.' But they are clearly not the main characters in this play. For decades, business strategy was understood as the search for a company’s optimal path to the future. In classic strategy textbooks, consumers are mentioned merely briefly. But I believe such an approach won’t let a company create a customer or a new product category. Uber built a new market category based on a simple idea: to make taxi service more convenient. I bet Travis Kalanick didn’t use the BSG matrix or Five Forces model while developing the application. Digital photography killed film photography not because Kodak made a mistake when making the SWOT analysis but because customers found it more convenient. Look around you. All successful businesses and products in the world have become successful for only one reason – customers have chosen them. The time of customer-free strategy has gone. The time for a people-based strategy has come. What is NOT a strategy A plan that can solve the challenges that keep you from reaching your ambitions is not a strategy if your aspirations are only about making it onto the Fortune 500 list. Strategy isn't about answering three questions: "Where are we now?" "Where do we want to go?" and "How do we get there?" Me, me, me – an egocentric approach leading to me-goals and me-strategies. Success is a consequence, not a goal. Strategy is not a means to an end because there is no 'end.' Strategy is the ongoing process of learning and improving your Value Waves. Discussing your strategy with your team has its own value because it alters how your team members think. Paraphrasing Dwight Eisenhower, strategy is useless, but strategizing is indispensable. A set of goals, however ambitious and audacious, is not a strategy. It doesn't give either the direction for development or the pace of expansion. A three-year business plan with Gantt charts and financial projections is not a strategy. A set of broad aspirations like ‘We will provide our customers with the best service’ is not a strategy. A list of broad initiatives and intentions, a so-called ‘one-page strategy,’ is not a strategy. A plan to increase your business's revenue and profits is not a strategy. M&A deals are not strategic moves if you make them only to increase your market share, profitability, or competitive position. They may become a strategy only if they will let you deliver more value to the key stakeholders. Digitalization or the use of AI can’t be a strategy if it doesn't deliver additional value to at least three stakeholder groups, including customers. If an initiative doesn’t promise additional value to at least three stakeholder groups, this initiative is not strategic. Building a great product is not a strategy. We are too obsessed with products. The best product is no product – when there is no product, but the problem is solved. We'll discuss customer needs in detail in Chapter 12. Contemplation questions – Which of the strategic mistakes mentioned in this chapter or book are you making? – What is your current strategy lacking that will help you grow your business even faster? – Is your strategy just a set of intentions? – Is your strategy just a set of goals? – Can every manager learn everything they need to make daily decisions from your strategy's text? Chapter 11. Blue Ocean Fallacy During the Gold Rush, gold prospectors searched for a promising location their rivals hadn’t yet occupied. Companies seek out market zones or niches with many customers and few competitors. But this is a flawed strategy. Where to play One of the most fundamental ideas of classical business strategy theory is that a company should ‘win the market.’ And that’s where the problems start. In his book “Playing To Win: How Strategy Really Works,” Roger L. Martin recommends that we should start strategizing with ‘industry analysis.’ But ‘market,’ or ‘industry,' is actually a metaphor. Nobody really knows where the market starts and ends. Economists refer to a ‘market’ as a place where customer desires meet opportunities. You may have encountered phrases like ‘the smartphone market has reached saturation…’ or ‘the car market amounted to X billion last year…’ The ‘market’ here refers to the amount of goods sold within a given period in terms of volume or value. Economically speaking, if a market has reached saturation, it makes no sense to enter it. Supply has satisfied demand, and competition is fierce. If your chief of marketing reasons this way, consider hiring someone else. Picture this: in a certain imaginary country, year after year, X individuals purchase Y apartments and houses, spending Z dollars on them. Economists would say that the market volume is Y houses or Z dollars. It seems like a perfect market equilibrium, a product-market fit. But let’s look under the hood. It’s safe to assume that more than X individuals want a new house but don’t purchase one for some reason. Economists insist that market demand = effective demand. If some people can’t afford a property, they are out of the market. Marketers and entrepreneurs would disagree. Everyone who has a need may become a customer. Suppose that houses are too expensive for many people, but you know how to build them much cheaper. You can become a king of the market and change it. In 1909, the car market in the USA was balanced. The average price of a vehicle was $1100 – $1700. Anyone who could afford it owned a car. But then Henry Ford offered the Model T at $825. By 1924 the price had gone down to only $260. The ‘old’ market evaporated, and the new one emerged. Could industry analysis have helped Apple create the iPhone? Could this analysis have helped Travis Kalanick create Uber? In other chapters of his book, Roger Martin rightly points out that a deep analysis of end consumer needs can change perceptions of industry boundaries. Yet, market analysis still occupies a dominant place in his reasoning. Circus and business strategy Adults rarely go to traditional circuses without children. Cirque du Soleil (CDS) broke this paradigm and revolutionized the industry. Chan Kim and Renée Mauborgne explored this case study in detail in their renowned book, “Blue Ocean Strategy,” published in 2004. The logic behind CDS’s strategy was pretty straightforward: – The traditional circus market was far too crowded (Kim and Mauborgne called it the ‘red ocean’). – It didn’t make much sense to create yet another typical circus. – Adults with no children young enough to be interested in the circus were non-customers. – The CDS founders created a new circus type – for adults (non-customers) and without animals. They built a ‘blue ocean,’ a market niche with many consumers and zero competitors. – They became fabulously wealthy. Being the sole fisherman casting their net in a pond is lucrative. It would be strange to claim this approach doesn’t work. It worked out for Cirque du Soleil and an Australian wine [yellow tail], the cases the authors researched in the book. But it narrows our perspective and causes us to miss out on many business opportunities. The market is not an ocean “The purpose of a business is to create a customer.” Peter Drucker First – there are no ‘red oceans’ Both Uber and iPhone burst into blood-red oceans. They didn’t target non-customers. They came to existing ones and offered another way to satisfy their needs. The Blue Ocean Strategy concept implies there are two oceans – a ‘red ocean,’ a market that exists ‘here,’ and a hypothetical market ‘somewhere out there,’ or a ‘blue ocean.’ But the market is a human-created concept. Nobody can say where it starts and where it ends. When Red Bull launched its ‘energy drinks’ in 1984, it didn’t create a ‘new market.’ It created new customers. There are consumers and their needs, and they don’t know they are part of a ‘market.’ People in many countries liked Uber and started using it. Consumers liked Red Bull and began to drink it. Both companies won customers, not markets. And building a new product for the current customers is not the only way to innovate. Second – ‘blue oceans’ are here I like a clear and concise definition of the market that Philip Kotler coined decades ago: A market = need or utility; target consumers; a place; time; the situation; experience Playing with this concept can lead to many exciting ideas. For example, changing one of the market components can create new customers. In 2007, a friend of mine was the CEO of a company that sold tea in colorful metal tins and boxes. People bought them as gifts. Supermarkets and grocery stores were the primary distribution channels of that company. But then my friend came up with the idea of selling the products in gift shops. The sales quadrupled within a year. Did he find a ‘blue ocean’? He managed to create new customers – those looking for a present. If they had not found his tins and boxes on the shelves, they wouldn't have bought another box of tea. They might have opted for eau de cologne or a candlestick. In Dubai, you can call a fueling vehicle that will refuel your car right in your parking spot. Both my friend and those businesspeople in Dubai changed only one part of the market definition – place, and capitalized on it. We can also change the time of consumption. Online marketplaces successfully compete with physical stores not only through delivery. You can shop there whenever you want, even in the middle of the night. We can also alter the situation of buying or consumption. Decades ago, people wore sneakers only to do sports. But companies like Adidas, Nike, Reebok, New Balance, and others persuaded us to wear them wherever we go. And we may change the experience our customers get when they buy or use our products. Before the 1980s, coffee was just a hot, refreshing drink. Flat whites, frappuccinos, and macchiatos were like, ‘What are those?’ But then Starbucks began its international expansion, and Nespresso revolutionized home coffee making. Today, we’re not surprised by coffee yoga, latte art (drawing on coffee foam), and TikTok coffee challenges. The primary goal of any business is not to ‘win the market’ but to create customers. I’m far from claiming that we should ignore competitors, market forces, or other factors that can help us solve the task or hinder us from creating customers. We need to collect the relevant data and think it through thoroughly. But we should start decision-making with customers, not competitors, distribution channels or suppliers. And we can do so by carefully considering customer needs. We’ll discuss it in the next chapter. Contemplation questions – What do you mean by the word "market" when discussing strategy with your team? – Do you consider people who may not realize they have a need for your product during your strategic planning? – Do you consider people who have a need for your product but cannot afford it or do not buy it for another reason during your strategic planning? – How do you define the market area in which you plan to operate in the future? – What is important to you when choosing this area? How do you determine if there are consumers there whom you can attract with your product? Chapter 12. Sixteen Basic Human Needs And Business Strategy How many video calls do you make per week? I bet a lot. Video calls are an integral part of our lives. Perhaps too integral. At least, that’s what I was thinking recently as I sat at the airport and unintentionally overheard a video conversation between a man next to me and a woman who seemed to be his girlfriend. They were delving into details of their romantic relationships that I found overly intimate. Maybe I am just old-fashioned. But you may not have known that when the Skype application was introduced in 2003, it was not the first such attempt in history. In 1964, when my father was just dating my mother, AT&T presented Picturephone. It was the first video conferencing service ever. The company tried to commercialize it a few times but fell flat. Why did Picturephone fail while Skype, Zoom, Facebook, Apple FaceTime, Google Meet, Teams, and WhatsApp succeeded? It’s tempting just to say that Picturephone was ‘ahead of its time.’ However, it explains nothing from a business perspective. Isn’t an innovative product you’re about to launch also ‘ahead of its time?’ What makes ‘big things’ what they are? Success occurs when the value a company offers aligns with customer needs, transforming these needs into demand. Let’s dive deeper into the issue. Why do you want what you want? Human needs Ages ago, a creature you wouldn’t yet call human figured out how to use sticks and stones to enhance its quality of life. This breakthrough sparked what we now call ‘evolution.’ Evolution is a process of learning. Over the years, Mother Nature has added new cognitive features to our brains – like developers keep adding features to a mobile app. The ones that helped us survive have taken hold. The ones that didn’t have disappeared. Our brains are the result of this long process. Two important points: 1. Brains evolve at a snail’s pace. Even a slight change takes centuries to take hold. 2. Evolution has taught us by giving us needs to push us in the right direction. Put simply, we can only want what has helped us survive as a species. So, if you want to learn something new or talk to a friend right now, it’s because having the same need helped your primeval ancestor to survive in the past. The ancient Maya tribes lived in Central America ages ago. They played religious games with heavy rubber balls. They’d wrap infants’ heads with a cloth to elongate them – a trendy head shape back then. They also bent their teeth to show off their high status. You, most likely, live in a city, use a smartphone and computer, travel, drive a car, and watch Netflix. You want your teeth to be straight and white. Yet, the same sixteen basic needs have not changed since the times of the ancient Mayans. Sixteen basic needs An American psychologist, Steven Reiss, conducted research involving more than 6,000 people on four continents. Reiss and his team identified 16 basic desires that all humans share: 1. Acceptance – the need to be appreciated 2. Curiosity – the need to gain knowledge 3. Eating – the need for food 4. Family – the need to take care of one’s offspring 5. Honor – the need to be faithful to the customary values of an individual’s ethnic group, family, or clan 6. Idealism – the need for social justice 7. Independence – the need to be distinct and self-reliant 8. Order – the need for prepared, established, and conventional environments 9. Physical activity – the need to exercise the body 10. Power – the need for control of will 11. Romance – the need for mating or sex 12. Saving – the need to accumulate something 13. Social contact – the need for relationships with others 14. Social status – the need for social significance 15. Tranquility – the need to be secure and protected 16. Vengeance – the need to strike back against another person So, we all, regardless of our sex, religion, social status, age, place of living, and other factors, share the same set of basic human needs. But then, what makes us so different? We prioritize these needs differently. Those who prioritize power and social status often become leaders. Those who don’t – freelancers or ground-level workers. People who focus on saving rarely become entrepreneurs. Others who value order can develop into good managers. You and your ugly neighbor have the same needs yet value different things. These needs are like pre-installed software in our brains. But we are what we prioritize. Doing business is about balancing the interests of six stakeholder groups. These groups consist of people. And they all have basic human needs. Hence, doing business means satisfying all these needs – to an extent. Below, I will illustrate this thesis with an example of customer needs. Customers are the most critical stakeholders. However, we can apply this approach to other stakeholders, too. Customer needs and customer value Every business must satisfy customer needs by creating customer value. It’s a no-brainer. However, many still confuse customer needs and customer value. Customers' needs exist solely in their brains. And we can do little to change their priorities. We can’t create a new customer need – read more below. Customer value is what a business creates for customers. When customer value, or, rather, multiple customer values, meet customer needs, demand emerges. Twenty years ago, Marc Zuckerberg offered you customer value – Facebook. And when you found out that it could satisfy your needs #1, 2, 5, 13, 14, and, maybe, 6 and 10, you created an account and started posting. Picturephone (1964) vs Skype (2003) What is a millisecond? It’s a time span between the moment I ask students in my lectures if we can create a new customer need and the moment somebody firmly answers, “Yes, of course.” No, we can’t do it. And Steve Jobs also didn’t do it by creating the iPhone. Human needs have been shaped over the ages by evolution, and no marketing genius can invent a new one. However, businesses can articulate a need or create a new way to meet it. What Steve Jobs did with the iPhone in 2007 was to offer consumers a new customer value. It works this way: 1. People have needs and satisfactory ways to meet them at any given time. Let’s take the need #13, Social contact. In the 19th century, sending a letter was the only way to communicate with distant friends. And people were fine with that. Post services and businesses that sold paper and ink generated value for them. 2. Imagine that some company focuses on this need and offers a new way to fulfill it, such as sending a telegram or making a phone call. The company builds a new value for customers and tries to persuade them to pay for it. 3. Customers may react differently. They can instantly fall head over heels for a product, which rarely happens. For instance, in 2008, a year after the iPhone launch, Apple sold only 11,63 million iPhones – not that much. Sometimes, users see no value in a new solution. Founders of failed startups can tell you a lot about it. In most cases, it takes years for new products to gain value in the eyes of millions. That happened with the Internet, smartphones, online shopping, social media, and many other solutions that now seem so familiar. 4. When a new product emerges, potential consumers make a subconscious cost-benefit analysis. Basic human needs often contradict each other. For example, the need #2, Curiosity, may conflict with the need #15, Tranquillity, or safety. The new solution may look exciting and has some advantages. On the other hand, the old one seems so familiar and safe. Should I send Bob a telegram, or would I better write a good old letter? 5. We call those who prioritize curiosity Innovators or Early Adopters. We dismissively refer to those valuing safety as Laggards. 6. But if the stars align, the new customer value meets some needs, and if multiple users are willing to abandon their familiar solution in favor of our new one, demand will emerge. So, what happened to Picturephone in the 1960s? People wanted to communicate. They had satisfactory solutions – phones, telegrams, letters. AT&T offered them a new value that seemed so obvious. With Picturephone, they could call their parents and see their faces on the screen. The company stumbled on three challenges: It was pretty expensive. If you wanted to make a video call, your recipient had to have the same device. But most importantly, not all potential customers were interested in making video calls. I wish that man at the airport was one of them. It turned out that most users simply did not like being seen on the screen, or, at best, found that it added little value. Even today, 21 years after Skype was launched, 20 years after Facebook was started, and 17 years after the iPhone was released, fewer than 50% of users utilize smartphones for video calls. Moreover, 65% of all video calls are done with audio only. Can they be called video calls? Skype, Zoom, and other video conferencing services outperformed Picturephone for several reasons: 1. They all offered free versions, at least as an option (it meets the need #12, Saving). 2. Users didn’t need to buy a new device to make video calls. 3. They offered many additional features (rooms, whiteboards, screen sharing, etc.) 4. When they emerged, people were familiar with computers and the Internet. The need #12, Saving, is not only about money. We like to save mental energy and rarely want to learn how to use new products. So: 1. In 1964, people had a need #13. AT&T tried to create a new value for them. 2. Although a few potential customers liked the idea, many others believed Picturephone violated their privacy (need #15). 3. Customers had to change their routines to use Picturephone, but they didn’t want to waste energy on learning. 4. Skype and the like offered more convenient and cheap solutions (so they provided more customer value). But even they haven’t completely replaced conventional phone calls. Value Ecosystem Every company is part of the Value Ecosystem, and it thrives only when it considers the interests of all stakeholders equally. To do so, the company leadership must: – Have a list of all stakeholders’ needs. – Decide which stakeholder values the company plans to create for each stakeholder group. If the chosen values meet stakeholder needs, demand emerges. And the company can benefit from it. A company can’t create a new customer need. But it can emphasize one or more of the 16 existing ones. Customers can’t have a need to buy a smartphone, a sofa, or a car. All these things are the ways to satisfy some of the basic needs. Even in the B2B world, humans remain humans. When they buy servers, excavators, or bearings for their company, their behavior is also driven by 16 basic needs. What we call ‘competition’ is businesses’ struggle to create more value for customers. When customer value a company proposes satisfies customer needs, demand emerges. A company can’t manage customer needs. But it can manage demand. Conclusion This chapter is the last one. In this book, I share my thoughts on strategy, which I have accumulated over my time as a CEO, board member, and strategy consultant. I hope it has helped you refine your strategic thinking. In Chapter 13, you will find a brief summary of everything discussed in the book, and in the appendices, a method for measuring customer value and questions that any strategy should answer. In my next book, which I have already started working on, I will focus on specific methods for developing red and yellow strategies. I hope you will enjoy it as well. If you enjoyed the book, follow me on LinkedIn. You can also use LinkedIn to ask me questions or provide feedback. You can also subscribe to my newsletter Strategic Seeing on the Substack platform. Subscribers are the first to read new articles and enjoy special offers on books and courses. Visit my website to learn more about my work. All the best, sincerely yours, Svyatoslav Biryulin Chapter 13. Key takeaways Ecosystems Every business has employees, shareholders, suppliers, and customers. Any organization – a for-profit or non-profit, a private or public – is a machine that exchanges value with multiple groups of people. An organization leader is someone who builds such value for a group of people (the team) that they are willing to create value for other groups (customers and others). Any business is a value ecosystem embedded in some higher-tier ecosystems – markets and societies. Any company – from a small cafe to giants like Google, Walmart, or Tesla – is successful if it can deliver value to every element of three Value Ecosystems and receive enough value back from them. These ecosystems are: The company itself The market the company works in The society the market exists in Different types of value flow to, from, and throughout any organization, morphing into different forms along the way. External and internal value chains a company is included in or consists of are parts of a large value stream, or Value Wave, that flows through all three ecosystems. Some links of this long chain are inside the company, and some are outside. External links include not just other businesses – suppliers, subcontractors, distributors, and so on – but also entities such as the labor market. The speed and ease of the Value Waves flowing through all ecosystems determine the quality of relationships between the first-level ecosystem – the company – and the other two ecosystems. This, in turn, determines the company's success. In business terms, an organization’s leader must understand all the links in the global Value Wave that their business is part of, even those they cannot influence. Stakeholders and Value Waves Every company must deliver value for six groups of stakeholders: ● Customers ● Employees ● Shareholders ● Business partners ● Regulators or watchdogs ● Society The business leadership does this by managing six relevant value streams, or Value Waves. Value Waves are sets of internal business processes that generate value for a particular group of stakeholders. The primary task of company leaders is to strike a balance between stakeholders’ interests, no matter how conflicting they can be. Every business rests on these six’ pillars,’ or Value Waves. Remove any of them, and it’ll collapse. Running a business means taking measures to increase the value it delivers to key stakeholders. Business success is not when shareholders are happy; it is when all stakeholders are happy. Customer satisfaction should be among your strategic goals. If shareholder value is your sole goal or metric, it reduces other stakeholders – customers, employees, suppliers – to mere assets. Business strategy is a set of practical steps to enhance the value by improving these Value Waves and building new ones. Strategic goals are clear targets that set the direction and pace of these steps for the employees. Purpose, goals, and success The purpose of a business is to build a great company that will outlive its founders. It can lose a game or a tournament but will win long-term. Setting SMART strategic goals seems logical only if we believe that one of the two following premises is correct: • We can foresee the future and somehow know that our goal is achievable as it was formulated. • Our ambitions, efforts, and hard work will enable us to change the world around us so that we will achieve it. Both premises are totally wrong. Success does not stem from our ability to set goals but from the opportunities we see around us. These opportunities arise from customers’ unmet needs. Goals are selfish by nature. A strategy must be customer-oriented. Goals are vertical, but processes are horizontal. Setting and cascading goals is not enough. You need Value Waves maps – the flow diagrams of processes reflecting all its aspects that can affect its outcome, or stakeholder value, directly or indirectly. Every goal implies a time frame within which we must achieve it. However, business is an infinite game. It never ends – as long as the company exists. Business is a continuous game, not a discrete one. We are used to quarterly or annual targets, plans, and reports. Yet when a quarter or a year ends, it doesn’t mean that a certain page in a company’s life is turned. There are no pages in life. Ongoing future thinking instead of time-bound goals is a reasonable solution. Strategic thinking is not a magic triad: “goals – decisions – actions.” Strategy is not what lies between us and our ambitions. Business is about value exchange, that is, about relationships between people. And the quality of these relationships determines its success, not the boldness of your goals. The relationship stability depends as much on what you give as on what you receive. The purpose of a CEO is not success. Their purpose is to create conditions in which success is the natural outcome. Strategy is not about finding a battlefield where you can win because business isn’t war. It isn’t even about establishing your own battlefield. It is about creating customers who are willing to pay the asking price for our product because it meets their needs better than alternatives. The "mission – purpose – action" scheme might be an alternative to the classical “goals – decisions – actions” triad. I am skeptical about the classical "goals – visions – strategy" top-down approach. We can start from smaller things – like our capabilities or customers' needs – and unfold the strategy based on these revelations and insights. We can set goals later. We should use goals and objectives mainly to achieve agreement among all the team members, from the board of directors to the front-line employees. We sit down and agree on what we will and won’t do. Central principles We must measure our success by stakeholder value, not shareholder value. We need to know at every moment how much value our organization creates for all stakeholders. Strategy is a company's constitution, a set of central principles that guide managers across all levels when making lower-tier decisions. Central principles reflect the approaches we use and the tools we deploy to create value for stakeholders. Strategy is a set of short- and medium-term plans to maximize the value for all stakeholders. These plans are designed so that their implementation will lead to the company's development in the specified direction (purpose statement) and at the chosen pace. Implementing these plans should allow the company to build a business that is resilient to external changes and focused on long-term sustainability and growth. Strategy is a set of answers to the question: "What problem should we solve, and why?" It is a number of projects at different levels on enhancing Value Waves. Red and yellow strategies We can choose between two strategic options: red strategy and yellow strategy. The choice depends on two factors: 1) The length of the product's lifecycle in the market 2) Your willingness to diversify your business A red strategy is a classical ‘goals – decisions – actions’ strategy based on market research and evidence. You analyze the market, weigh the alternatives, choose the path, and make long-term action plans. A red strategy may look like a Gantt chart containing a set of meticulously elaborated projects. A yellow strategy may look like a list of initiatives, but you keep many doors open. You encourage your team to find new opportunities and are willing to adapt the project list if they do. The only things that never change in a yellow strategy are mission, purpose, and culture. You can alter any other aspect of your business if a new opportunity requires it. Your list of Central principles is shorter and less detailed. The red strategy is not an old-fashioned, rigid, or obsolete approach, and the yellow strategy is not a modern, ‘agile,’ or advanced avenue. We need to choose the tool that is appropriate to our situation and vision. Market, customer needs, and customer value The ‘market,’ or the ‘industry,' is a metaphor. Nobody knows where the market starts and ends. What economists refer to as a ‘market’ is essentially desires meeting opportunities. Everyone who has a need may become a customer. A market = need or utility; target consumers; a place; time; the situation; experience An American psychologist Steven Reiss conducted research involving more than 6,000 people on four continents. Reiss and his team identified 16 basic desires that all humans share. So, we all, regardless of our sex, religion, social status, age, place of living, and other factors, share the same set of basic human needs. But then, what makes us so different? We prioritize these needs differently. Every business must satisfy customer needs by creating customer value. Customer needs exist solely in their brains. And we can do little to change their priorities. We can’t create a new customer need – read more below. Customer value is what a business creates for customers. When customer value, or, rather, multiple customer values, meet customer needs, demand emerges. A company can’t manage customer needs. But it can manage demand. Stakeholder value Every company is part of the Value Ecosystem, and it thrives only when it considers the interests of all stakeholders equally – customers, employees, shareholders, business partners, regulators, and society. The company leadership must: – Have a list of all stakeholders’ needs – Decide which stakeholder values the company plans to create for each stakeholder group. If the chosen values meet stakeholder needs, demand emerges. And the company can benefit from it. A company can’t create a new stakeholder need, but it can emphasize one of the 16 existing ones. Chapter 14. Appendix 1 How do we measure customer value? A company must create value for its customers. How can we measure it? I use the SEARCH model to help my clients understand if they are creating value for their customers. SEARCH stands for: 1. Satisfaction 2. Emotion 3. Affordability 4. Recommendation 5. Continuity 6. Hesitation Satisfaction: Do our products match customer needs and expectations? Emotion: Do our products generate positive feelings? Affordability: Do our customers believe that we charge a fair price for our products? Recommendation: The customers’ willingness to suggest the product or service to others. Continuity: The customer’s intention to keep purchasing the product in the future. Hesitation: The customer’s hesitation to switch to a competitor’s product. How can we measure it? The only way is to do customer research. The only place customer value truly exists is in their mind. Chapter 15. Appendix 2 Red strategy: 25 questions Below, you will find a list of 25 questions that I usually pose to the team when developing a strategy. However, before using the list, please consider the following: 1. This is a list for a red strategy only. 2. This is a comprehensive list – sometimes, we start acting strategically without having answers to all 25 questions. 3. We do not always seek answers to these questions in the order they are listed. Most often, we start with consumers and their needs. Questions for the red strategy: Section 'Concept' 1. What is our mission? 2. What are our corporate values? 3. What is our purpose? Section 'Context' 4. What changes do we expect in the external environment? What threats and opportunities do these changes hold? 5. How will the market value chain change in the industries and geographies where we plan to operate? What threats and opportunities does this entail? 6. What are the key needs of our shareholders, regulators, and society? Section 'Business Model and Central Principles' 7. Target markets – in which geographical areas do we plan to operate? 8. Target customer segments – who will be our target customers? 9. Key customer needs that we want to address. Which needs will we focus on? 10. Key values that we will create for target customers in response to their needs. What values will we focus on? 11. Path to value monetization. How will we convert the value created for various consumer groups into revenue or margin income? 12. Path to value promotion and positioning. How will we communicate to clients the important values we have for them? 13. Key assets, tangible and intangible, we need to create or develop (and those to be abandoned). What assets will we develop first? 14. Key Value Waves, or processes we need to create or develop (and those to be abandoned). Which processes will we develop first? 15. What are the key needs of our employees, and how exactly do we plan to meet them? 16. Culture – what corporate culture will we need? 17. Key competencies – what competencies will we need to implement the strategy? 18. What organizational structure will best help us implement the strategy? 19. Key partners – what are our goals regarding them? What are their needs? Who will be responsible for working with them? What values will we create for them? 20. Key values that we will create for our shareholders, regulators, and society. What values will we focus on? Section 'Implementation Paths' 21. What are our strategic goals? The answer to this question should include goals related to meeting the needs of all six stakeholder groups. 22. What is our target financial model? 23. What are our main strategic projects? 24. What risks will we face, and how will we address them? 25. What key metrics will be important for us, including metrics that reflect our ability to create value for six stakeholder groups? Yellow strategy: Crucial questions Section 'Concept' 1. What is our mission? 2. What are our corporate values? 3. What is our purpose? Section 'Context' 4. What are the key needs of our shareholders, regulators, and society? Section 'Business Model and Central Principles' 5. What is our hypothesis about preferable markets and the geographical areas where we plan to operate? 6. What is our hypothesis about preferable customer segments and who we believe will be our target customers? 7. How will our approach to continuously identifying customer needs and generating value for them look? 8. Priority assets, tangible and intangible, we need to create or develop (and those to be abandoned). What assets will we develop first? 9. Priority Value Waves, or processes that we need to create or develop (and those that need to be abandoned). Which processes will we develop first? 10. What are the key needs of our employees, and how exactly do we plan to meet them? 11. Culture – what corporate culture will we need? 12. Key competencies – what competencies will we need to implement the strategy? 13. What organizational structure will best help us implement the strategy? 14. Key partners – what are our goals regarding them? What are their needs? Who will be responsible for working with them? What values will we create for them? 15. Key values that we will create for our shareholders, regulators, and society. What values will we focus on? Section 'Implementation Paths' 16. What are our strategic goals? The answer to this question should include goals related to meeting the needs of all six stakeholder groups. 17. What is our target financial model? 18. What are our main strategic projects? 19. What risks will we face, and how will we address them? 20. What key metrics will be important for us, including metrics that reflect our ability to create value for six stakeholder groups?