Transcription
[Music] Well, thank you, Holden, and uh, and Buck. I don't see Buck, but thank you, Buck, for inviting me. Uh, I wish I could be there. Uh, I, I love it at, at, uh, at, uh, at UNC, and, uh, I've, I've been there many times. Times, and, uh, I'm sorry I can't be there because of my other duties here. But it's a real privilege to, uh, get a chance to participate in this course. It's a very innovative course, and, uh, we're very impressed here with what you're doing. Uh, we wish we had one, um, here at Harvard.
So, um, what I'd like to do, uh, in about, uh, uh, you know, 45 minutes or so, is see if I can't, uh, give all of you, uh, sort of a way of thinking about strategy. Uh, strategy is a word that gets used a lot. Um, it gets used almost, uh, you know, indiscriminately, uh, to describe a lot of different things. Um, but I think at the core, we all sort of have the gestalt of strategy. Strategy is kind of the big picture of how the organization is going to win, uh, in its environment, whatever that is. And, um, but yet, you know, what that really means and how to think about it is, is actually still, uh, an issue that I find a lot of management teams of major companies struggle with. And, um, so, the, my hope is that in a, a very short amount of time, we can talk about kind of some of the essential ideas of strategy. Uh, I'll be talking a lot, uh, mostly about the, uh, kind of for-profit world, but, uh, these ideas are equally, uh, applicable to any organization, any NGO, any nonprofit, uh, that's actually serving a customer, uh, in any way. Uh, and I do have a few slides at the end, which I may, may not have time to cover, which, uh, actually give you the bridge between for-profit and nonprofit.
Um, so, uh, I'd like to suggest that, that this way of thinking, um, is ultimately going to have a profound impact on the success of any organization. Um, it's not the only thing that matters, as we'll see. Um, U, you know, a good strategy poorly executed is not going to succeed. Uh, but, but ultimately, what we learn over and over again is just good execution rarely allows you to be truly superior and truly, uh, you know, change the world in, in whatever you're trying to do. You actually need to have a great strategic sense of, of how your organization is going to compete. And, uh, so, let's talk about that today. Um, the slides here that I'll show, uh, of course, we'll make available to you. Um, and, uh, we, with, uh, with all, uh, uh, we, we'll also leave time for some Q&A at the end. And, uh, I understand that Buck has some questions for you that he's going to ask, ask you to, uh, respond to later on. So, uh, I guess that's at least some modest incentive to, uh, to pay attention even more than you ordinarily would.
Um, so, let's, let's talk about strategy. Um, let's talk about what we mean by a strategy. Let's talk about kind of the key ideas in strategy. And I think the starting point for that is really to step quite far back and ask, you know, what is the fundamental, sort of strategic challenge of any organization? And, um, here, um, what I find is that, that many, many managers and, and leaders in organizations really start the whole process of thinking about strategy on the wrong, uh, on the wrong foot. Um, I think most, most organizations, I think, when they try to understand, "What am I trying to do in my, in my industry, in my marketplace?" they think that, that their job is really to be the best organization in their industry. The best car company, the best retail bank, the best, uh, maker of toothpaste. Um, um, and to be the best, we have to come up with the best product, and the best service, and the best supply chain, and the best, um, uh, customer support model. And if we can figure out in our organization how to be the best, how to, how to get it right in terms of all those key dimensions, we will ultimately win. Uh, that's the kind of thinking process that, that most organizations follow still to this day, uh, at least in my experience. And, and I'm very privileged, I get to work on strategy with, you know, hundreds of organizations in every possible field, uh, over the course of, of a year or two of my, uh, of my work.
Now, what we've come to understand, I think, is that that is a very dangerous way of thinking about competition, and it's a very dangerous way of thinking about strategy. Um, indeed, there is no best company in any industry. That whole idea is, you know, kind of flawed from the very start. You know, what's the best car or the best car company? Well, it really all depends, doesn't it? It really depends on what needs that company is trying to serve. Uh, the best car to serve the, uh, a middle-income, uh, person is not the best car to serve somebody living in an urban area with no parking space. And that's not the best car to serve, um, U, you know, other needs. Uh, you know, what's the best retail bank? Well, it all depends on who the customer is and, and what the customer's needs are. There's lots of different customers in virtually every business. And, uh, uh, and, and what we find is it's, it's impossible to be the best at serving every need of every customer. That is a fundamentally flawed way of thinking about what the job is of any organization. Uh, instead, uh, in thinking about strategy, really the starting point is not being the best. The starting point is thinking about how we can be unique. How an organization actually can, can create unique value for the customers it's seeking to serve.
Uh, that is the, the essential starting point for thinking about strategy. Um, if, if you're actually delivering unique value to the customer, uh, you choose to serve, you will truly be able to win. Uh, whereas if you're trying to be the best at, at sort of, uh, competing in the industry, what that tends to lead to is kind of a zero-sum competition where companies actually, uh, ultimately, uh, uh, uh, start to do the same thing and ultimately, uh, uh, are not able to succeed in the long run. So, the, the fundamental question of strategy is really not about being the best, but it's about being, uh, unique.
Now, you know, to take it one step further, um, you know, what's strategy versus the other agendas of management? Um, well, uh, strategy is different than the goals. It's different than the aspirations. Uh, I, I, but, you, you'd be surprised how many management teams don't understand this. You know, I hear a lot of managers say, "My strategy is to be the number one company in my industry." "My strategy is to be, uh, to grow, uh, faster than, than the market." Is that really a strategy? Well, no, that's actually a goal. That's actually an aspiration. Uh, it may be a good goal. It may be a, a very exciting goal. But, but the strategy is not the goal. The strategy is how you're going to position yourself in the organization ultimately to hopefully achieve your goal. How do you get to be number one? How do you get to be number one or two, or whatever, however you describe your goals? How do you actually get there? What's unique about you? What gives you an advantage? Why would you be number one? Why would you be number two, uh, in your industry? That's the strategy part. So, we've got to clearly separate the strategy from the goal.
We've also got to clearly separate the strategy from any particular action that you want to take, uh, or think you should take. So, so for example, uh, you know, I hear a lot of managers say, "Well, my strategy is to internationalize my business." Well, you know, is that a strategy? Uh, well, not really. That, that's an action step. That's an action you need to take, uh, possibly to be successful. But it doesn't actually say what your unique advantage is. It doesn't really describe why you're going to win. It's just something you need to do as part of your journey to building out your organization. Um, uh, strategy is different from any individual action. Strategy is the position you seek to occupy, uh, in the marketplace, and the advantage on which you will compete. And there's going to then be many, many action steps that have to be taken to get you there. But those action steps are not the strategy. The strategy is the, is that core understanding of, uh, your distinctive, uh, position.
And, uh, finally, uh, strategy is different than mission or vision. You know, a lot of organizations have mission statements, vision statements, describing their purpose as an organization, describing their aspirations for serving their customer, and so forth. Um, but mission and vision isn't strategy either. Um, mission and vision tends to be motivational. It tends to be very broad. It tends to be very, uh, inspirational. Um, and, and those things are good in, in motivating an organization, creating a sense of purpose. But again, that's not strategy. Strategy is very concrete. It's very specific. It, it's really about the choices you make about how you're going to distinguish yourself and deliver that unique value, uh, to the customer. And, um, and the, the clearer we are about where strategy fits in the overall architecture of the things managers need to do, uh, the clearer we'll be about actually setting strategy well.
So, let's talk about, you know, how we would think about creating a, a really successful strategy. Well, the first thing we have to understand is, uh, that the kind of core of all strategy is strategy at the level of an individual business. You know, some people call that business strategy. Now, there are many companies like General Electric that compete in many different businesses. You know, General Electric makes locomotives, you know, for railroads, and they make wind turbines, and they make, uh, uh, and they make, uh, aircraft engines. Um, and, and, and there is an issue of strategy for a diversified group. We call that corporate-level strategy. But business strategy is really the core of all strategy because it's in the individual industry, in the individual marketplace, where the dominant, uh, determinants of whether a company wins or loses, uh, uh, actually occur.
So, I'm going to be talking today almost totally about business strategy, how to compete in a particular business, with the understanding that some companies are in multiple businesses. They need a clear strategy for each of those businesses. Um, but at the, at the business level, um, we, we understand, uh, uh, from, you know, all the work in this field, that performance at the business level is really a function of two things. One is the business itself, uh, because businesses actually differ in their inherent, uh, attractiveness from a point of view of profitability. And that's what we call industry structure. Uh, every company competes in an industry. That industry has a structure, and that structure can make it harder or easier for the average company to be profitable and to improve that profitability over time. Uh, that's one part of kind of strategic thinking. The second part of strategic thinking is the positioning of the company within the industry, how that company, uh, uh, kind of differs from its rivals. Think there about, you know, General Motors, you know, versus Ford, you know, versus, uh, Toyota versus BMW. Um, uh, and, and superior performance, uh, in terms of excellent profitability and growth, is affected by both of these things. It's affected by the inherent attractiveness of the industry, uh, it's also affected by the, the quality, uh, and of the position that the company is able to occupy.
And we need to be careful to pull these things apart. We've got to understand what's driving success. Is it the industry issues that are really driving our profitability? Uh, is it the positioning issues? Or is it some combination of the two? We have to be able to kind of parse our understanding of the problem of competition and the problem of strategy into those, uh, two very different buckets. You know, you could be a, a, have a great position in a lousy industry. You can have a mediocre position in a terrific industry. Uh, you've kind of got to understand where that performance is ultimately coming from. So, good strategic analysis includes industry analysis, and it also includes positioning, uh, uh, positioning analysis and positioning thinking.
Now, on the industry side, um, um, you know, what we understand now is that when we look at an industry, the, the, the really way to look at an industry is to look at its fundamental structure. Now, lots of things are different about industries. The products are different, the manufacturing is different, the technology is different. Industries vary dramatically, and every industry is different. But every industry has a set of fundamental structural characteristics that we have to look at, and they're illustrated on this slide. This is the so-called five forces that some of you may have heard about. Um, and the five forces model says that what really drives profitability is these five things about an industry: the ultimate power of the customer to push down the price and drive down the profitability; the power of the suppliers of inputs, components, machines, services, to raise their price and drive down the profitability; industry, the whether there are substitute products or services around, you know, whether there's plastic is going to affect, uh, the profitability of aluminum, uh, that's a substitute; the barriers to entry, how hard it is for new companies to actually get into that business. If it's easy, profits are going to be low. If it's really hard to get in, the industry that supports, uh, higher returns. And then finally, the nature of the rivalry, uh, among the companies that are already in the industry. If rivalry is fierce, and it's based on price, profitability is going to be low. If rivalry is perhaps based on features or service or image or brand, then that tends to support, uh, higher levels of profitability.
So, in, for any industry, to understand the average level of profitability in the industry, uh, we have to really understand these fundamental structural forces. And industries like airlines, that have horrendous profitability and have for decades, have horrendous profitability because they have an unattractive industry structure. You know, too easy for customers to switch, too much customer power, too much power of the airframe and engine manufacturers, too many alternatives to the airplane, and too much rivalry because the costs are fixed, really make airlines a very unattractive industry. Very few airlines make money, uh, and they don't make it for very long. Uh, uh, it's, it's, it's a very unattractive industry. But, for example, business software is a very, very attractive industry because the customer often gets locked in. The cost of switching from one kind of software to another is almost impossible in many cases, certainly on the business side. Uh, you know, uh, the nature of the rivalry is much more attractive. There are no substitute products. The barriers to entry are very high because you have to spend, you know, tens of hundreds of millions of dollars to develop the software upfront in order to play in the game. Um, so software is very profitable. The average profitability is much higher in software than in airlines, and that's not an accident. That's not cyclical. That's not random. That has to do with the underlying industry structure. And so, being, doing good industry analysis is then critical to, to anybody developing a strategy, to any of you, uh, thinking about getting into a new business or starting a new venture. You've got to understand the fundamental industry structure in which you want to play and how it might evolve over time.
So, uh, that, that then becomes one critical part of, of strategic analysis and strategic thinking. Uh, but today, I'd like to focus more on the second part, which is the positioning. So, so suppose you're going to compete in the airline industry, or suppose you're going to compete in business software. We know that the average is going to be different in terms of profitability. But how can you be above average, uh, in whatever industry you're competing in? And, and more importantly, how can you avoid being below average, uh, in terms of the profitability? How do you achieve superiority in performance? That is the fundamental positioning question. And, to understand positioning, we have to start at, at really the, a broad level, and that is to understand why would a company be more profitable than its competitors? And the answer to that is, there's really only two ways you can be more profitable, uh, than your competitor. One is you can be able to command a higher price because you offer something that the customer is willing to pay more for, and that's what we call differentiation. Differentiation. Um, and the second reason you might be more profitable is because you can produce an equivalent product or service at a lower inherent cost. And so, at the same price, uh, you'll be more profitable, or even at a discounted price, you're so efficient that you can be more profitable. All superior performance comes from either getting a higher relative price or achieving a lower relative cost because of the choices you've made about how to compete, about how to configure, uh, your, your organization.
Okay. So, uh, you know, at the starting point of, of any strategic discussion is, okay, what are we trying to do here? Are we trying to be the differentiator? Uh, are we trying to be lower cost? Are we trying to do this, uh, for many customers? Are we really trying to focus on a narrow segment of the market and be differentiated for that segment? What is our fundamental overarching route to competitive advantage, to superior profitability? Uh, that is really the first broad step in, uh, strategic, uh, thinking.
Now, in order to take that further, we need now the concept of the value chain. The value chain says that in any business, in order to compete, what that means is we have to perform a whole set of what we like to call activities. Activities, activities are things that a company does to actually, you know, create the product, design the product, make the product, provide service, provide support after sale, market the product. Um, the value chain is really a framework for seeing the firm as a set of activities. Uh, and the, and the headings in this value chain, sort of these are a generic set of headings. These are headings that are sort of general. They apply to any business, but of course, every business is different. So, here you see a value chain for building houses. And now, once we focus on home building, we can take the value chain idea and we can then specify it to that particular business. So, you know, in, in, in, in develop, in building houses, we have to acquire the land somehow, and then we have to actually make the H, build the house, and then we have to find customers, and then we have to close the transaction, and then we have to provide support over time, uh, you know, after, after the sale of the home. And, uh, uh, and the top part of the value chain is the supporting activities, uh, that allow us to, uh, conduct the, what we call the primary activities along the bottom, uh, like, you know, we got to do the procurement, we got to purchase inputs all along the value chain. We've got to bring, we have to hire people, retain them, train them. So, so again, uh, U, this is all hopefully intuitive to you, just looking at this chart. And the basic idea is that all competitive advantage, and all higher price, and all lower cost, comes from choices the company has made about how to configure the value chain, about how to do these things in the value chain. So, if you have lower cost, it's because there's a number of things in the value chain where you figured out how to do it more efficiently. Uh, and if you have higher price, uh, that's because there's certain things you've decided done in the value chain that allow you to deliver that great value, uh, that allows that customer to say, "I, I'll pay a premium for that." And that could be in the design, that could be in the service, that could be in the branding, uh, that could be in a lot of different places. But the value chain allows us to get now really specific about where the competitive advantage comes from.
And that's why it's so important. You know, the old ideas about strategy were, you know, you looked at your strengths and your weaknesses, and your opportunities and your threats. And that was a very broad, you know, quite a powerful way of thinking about, you know, how to think about how you were going to compete. But the value chain says, no, we got to get much deeper than that. We've got to really look at great detail at how we actually go to market, how we actually make the choices about how we're going to compete in the organization. That's where all competitive advantage comes from. This then becomes a critical tool in, in thinking about positioning.
Now, then we, then we, then we make a very fundamental distinction. And, and this is something that, you know, all, you know, great leaders understand. And that is, as we pursue competitive advantage, there's really two ways of doing that. Uh, one is to be more operationally effective. Um, and think of operational effectiveness as, "Do the same thing better." You know, uh, and think of operational effectiveness in terms of best practices. You know, there are best practices out there. They're being invented all the time. Operational effectiveness is just assimilating all the best practices, being up to date, having the most modern machines, having good, up-to-date software, you know, understanding the latest thinking in how to motivate a sales force. Um, you know, using the internet, you know, to, you know, reach your customer. Those are all best practices. And part of success, and part of advantage, is operational effectiveness, continually raising the bar, uh, on operational effectiveness. Indeed, this is about, you know, 90% of the job of any leader is operational improvement. You know, figuring out new ways of doing things better, and, you know, making those happen within the organization. Um, that is critical to success. If you're not operationally effective, strategy doesn't matter. Let me say that again: if you're not operationally effective, strategy doesn't matter. Because you're going to give up too much cost and quality in the process of not being operationally effective. And you may have a great strategic positioning, but it's not going to matter because your competitors are going to eat your lunch. But the theory says that operational effectiveness, although a necessity, is not sufficient actually to achieve superior performance, and particularly not for long. Because if it's a best practice for you, it's going to be a best practice for your competitor. And slowly but surely, your competitors are going to figure this stuff out. And if all you're doing is implementing the same best practices, it's very hard to be distinctive and and unique and offer something different. Instead, if all you're doing is implementing the same best practices, we have something that I like to call strategic convergence. Everybody starts looking the same. And where all the companies look the same, and are offering pretty much the same products, with pretty much the same features, with pretty much the same services, then what happens is competition has to gravitate to price, and price starts going down.
Uh, you know, the worst mistake in strategy is to get into a competition on the same thing. If your competitor is competing on after-sales support, the last thing you want to do is compete on after-sales support. You want to find another way of competing to deliver unique value to customers that care about that. Uh, and if all you're doing is thinking about the world in terms of best practices and operational improvement, uh, you fall into that trap, uh, of, of, you know, you get better, uh, but you're not, you're not profitable. Uh, you're not actually winning. Uh, you're, you're, you're rushing to stay, you're rushing to stay, uh, in the game. Um, and, um, very few sustainable competitive advantages come from operational effectiveness. Most of them come actually from strategic positioning that's different. Strategic positioning kind of presumes that you're operationally effective. But strategic positioning is all about making choices. Choices. Operational effectiveness is just about executing best practice. There's no choice there. Uh, strategy is about making choices about how you're going to be different, not doing the same thing better, but choosing to be different in order to meet a different need of a set of customers that you've chosen to serve than your rivals. That's the fundamental distinction between operational effectiveness and strategic positioning. Both are critically important. But what we found is that that it's the strategic positioning part that often gets overlooked or or or or or under, under focused on. Um, and companies just find themselves caught in a game that they can't win because they're just implementing the same best practices that everybody else is is implementing, and they're just copying what they see other people doing, rather than actually making choices about how to be different, how to be unique.
Okay. Now, in order to then develop a robust strategic positioning, we, we now, I think, understand that there's some basic attributes of a successful strategy. And so, let me very quickly, kind of cover those attributes, uh, and then, uh, we'll talk a little bit about, you know, uh, uh, you know, how to get there, and then a little bit about how this can be, kind of, uh, ported into the world of nonprofits. First attribute of a winning strategy is the organization must have a unique value proposition. You've got to offer something different to the customers you're choosing to serve than your competitors. That, that's kind of step number one. If you're trying to be better at producing the same product with the same manufacturing, with the same service, to the same customers, at the same price, you don't have a strategy. You know, you're competing on operational effectiveness. Uh, now, what's a value proposition? A value proposition is the answer to three basic questions. Um, one, uh, what customers, uh, what set of customers are you choosing to serve? Uh, that's a critical question that every strategy has to answer. Uh, now, you know, the typical default answer is, "Well, we'll serve everybody. You know, anybody wants it, you know, can come." Well, that, that's not strategy. That's, that's, that's the slippery slope to mediocrity. Uh, a strategist, uh, has to understand what customers you actually want to serve. Um, and then the next question is, what needs of those customers are we particularly going to try to meet, uh, uniquely well? Uh, that's, that, that's the second question. And then, at what price are we going to ask for a premium? Are we going to offer, you know, parity? Are we going to see, make, offer a discount because we found a way to be really, really efficient in meeting the needs of who we want to serve? Uh, those are the three questions that constitute a value proposition. And, um, the, the, the key principle of strategy is your answers have to be different than the competitors. You know, if you're, if you're serving the same customers, and meeting the same needs, at the same price, you don't have a strategy. You're just competing on who can do the same thing better. That's operational effectiveness. That's a hard game to win, particularly if your competitors are not idiots. You know, if they're not brain dead, you know, you, it's a hard game to win. Uh, but, but strategy says, you know, we don't, we don't compete head-to-head. We, we, we compete to be unique.
Now, let's, let's take an example of that. Uh, this is a company that I know very, very well, IKEA. And you all probably know it well because many of you sitting in that room are, are part of their target customer group. Um, you know, what's their value proposition? Well, um, they don't look like Ethan Allen. They, they don't look like a lot of the other furniture stores, furniture retailers. Um, and, and the starting point is really who they're trying to serve. Um, and you see on the slide, um, you know, they're trying to serve people who really appreciate design, who appreciate, you know, products that are good quality and decent materials. Uh, but they, they're, they want their serving customers actually want to get that at a very low price point, a very low price point. Um, and, uh, in order to, uh, to do that, they're going to, they're going to actually meet quite a large set of the needs of those target customers. They have a wide line of furniture and accessories for, you know, every room in the house. They have collections. Uh, so they're, they're going to try to meet a lot of needs of those particular group of customers. Um, and, um, and, and we'll kind of get a little bit into that later on. So, basically, IKEA has made a choice about who we are trying to serve. Um, and, um, and, and that is the starting point for strategy, and how we are going to define value for those customers in our own unique way.
Okay. Um, and, you know, I know this company very, very well because, uh, my daughter, my oldest daughter, Lana, um, went to the University of Pennsylvania. And, uh, virtually every time that I went down to Philadelphia, which was once every six weeks or so, you know, she would often call ahead and say, "Dad, could you rent an SUV, uh, when you come down?" You know, and, and I would say, "Well, of course." But, you know, "Why do you want that?" And she'd say, "Well, you know, I want to go to IKEA. I want to go to IKEA." Uh, and so we would, you know, so I got to know, I got to know this organization very well. And, and it was clear that that all often great strategies don't involve sort of traditional segmentation schemes of the industry. You know, IKEA customers are not old or young, although they're a little bit skewed to young. But they're quite, they're not, they're not rich or, or poor. They tend not to be super rich, but they're a wide variety of incomes. But they're people who are unified in a certain set of needs: compact, space-efficient, uh, furnishings, you know, style and design, um, but, but at a, at a very low price. And, um, um, and, U, you know, that's the starting point for strategy. You know, who do you really want to serve, and what set of their needs are we going to actually try to meet, uh, with our, uh, strategy?
Now, that leads then to the second attribute of a successful strategy, and that is, you've got to have a different value chain. You can't be conducting the business in the same way. You know, if you have the, you know, same product development, the same manufacturing, the same supply chain, the same customer support, the same kind of marketing, you don't have a strategy. You can have the greatest slogan in the world about your value proposition, but unless the value chain allows you to be uniquely good at delivering that value proposition, then the strategy is kind of all hot air. Uh, U, so, if, if we go back to IKEA, we see all the choices they've made in the value chain. Um, and, and the key, you know, uh, thing that they figured out was the, the whole modular concept. That is, that if you design furniture so that it was easy to assemble and disassemble, you could, you could ship both inbound logistics, but also get to the customer. You could, you could actually, uh, move the customer, the product around in a box of the pieces of the furniture, rather than have to ship couches and, you know, and bedroom sets around, which are bulky and expensive to ship. Um, and, uh, it's that modular concept that was one of the key choices they made, uh, about how they were going to configure their value chain. But there was a whole lot of other choices. Uh, you know, IKEA has these huge stores. Everything that IKEA has is in the store. There are no choices. There are no options. There's no customization. Uh, basically, it's there, uh, it's in the store. It's sitting there. You can look at it. Um, there's virtually very low in-store service. I mean, if you go to IKEA, and there's somebody that has an IKEA, you know, shirt on that says IKEA, and you look in their direction, they usually turn around and run in the other direction. They don't want to help you. That's, that's not their strategy. They, their, their products are well described on the internet. They're well described in the store in terms of the basic facts and figures. There's no customization. Uh, they don't want to spend the money to have an in-store person, you know, talking to you and coaching you. That's, that's not part of their strategy. Their customer, their value proposition, that isn't what it's all about. Um, you can see the other choices. Uh, you, in IKEA, you can't buy a piece of furniture. All you can buy is a box. And then you, then, you know, Dad has to back his SUV up, and you have to put the box in, and then daughter and Dad get to, you know, schle the box up the stairs, you know, into her dorm room. And then we get to have a, you know, pre-Christmas experience, you know, putting together the furniture into parts. And that's, that's their, that's their value chain. That's the choices they've made. Um, and that's very appealing to my daughter Lana, because, uh, she gets the terrific stuff that's cool and appeals to her design sensibilities, uh, but she gets it at a really low price point. And she's willing to do all that stuff. I mean, she doesn't need to have a salesperson. She doesn't need to have somebody show up with a moving van, you know, to put the, put the furniture in her, in her dorm room or her apartment. Um, the value chain is aligned with the value proposition. And that then becomes the second part of a really great strategy.
Uh, the third part is the concept of trade-offs. All great strategies involve making trade-offs. A trade-off is where to do one thing really well, you deliberately choose not to do other things. Uh, and I like to say that the real test of a strategy is whether you've chosen not to do things. It's not just what you've chosen to do, but also, but also what you've chosen not to do. You know, what needs do you not serve? What customers will you not try to, you know, please? Uh, that is essential to all great strategies. IKEA is a great example. I, I can tell you right now, with no disrespect to the company, I hate IKEA. I don't like it. Every minute I'm there, I'm unhappy and uncomfortable. I would never shop there. I would never buy that product. I'm not interested in putting together the furniture. I'm not interested in taking my SUV and getting it. I'm not interested in any of that. Uh, my daughter loves it. I hate it. And one of the very interesting things about strategy, and if you can remember, you know, one or two things from the talk, remember this part: strategy is the willingness to make customers unhappy. If you're going to have a successful strategy, you can't try to make everybody happy. You've got to make some customers insanely happy, but other customers, you just have to be cool with the idea that you're not meeting their needs, you know, and you're not serving whatever, you know, needs they have. So, you know, uh, if I filled out a, a customer comment card after an IKEA visit, you know, I would give them, you know, bottom ratings for everything. But IKEA needs to look at my customer comment card and say, "Oh, we don't care. That's not who we're trying to serve." But in a world where we have all these slogans like, "You need to please your customer and delight your customer," companies get totally wrapped around the axle here. They, they think that their job is to make everybody happy. And if somebody gives them a complaint, they should be very attentive to that. Well, most of the complaints you get are from people that you're not trying to serve, and they've stumbled into your store. Uh, and, and you just have to ignore those. But if one of your target customers gives you some negative feedback, boy, we rivet our attention on that. So, you can see the nuance of strategy, um, and you can see how subtle it is, and how you can get, you know, really confused about what, what the strategy thing is all about. Um, uh, trade-offs become critical. Pleasing every customer is a disaster. Um, you know, trying to have it all and offer every service and meet every need is, is, is doomed to failure. A strategy is fundamentally about trade-offs. Um, and this slide just, you know, catalogs some of the IKEA's trade-offs that, that, that you're well aware of. I mean, if you want, if you want special custom varieties, then, you know, IKEA just says, "Well, I understand that, but we don't do that. We don't do that." And, uh, and, and essentially, it's the what we don't do stuff that really lifts IKEA to the level of extraordinary performance. Never, ever imitate it, uh, because it's very hard to copy IKEA, uh, if you're another company, without, uh, ultimately eroding whatever, uh, advantages you've had in your organization. Uh, and ultimately, their advantage has been very, very sustainable. Lots of strategies have sustainable advantages. Uh, there's some people in, in, in the field of management thinking that believe that no advantage can be sustained, and that's complete and utter BS. Most great companies sustain their advantages for decades. Everybody's known IKEA's strategy now for 30 years. All you have to do is walk into the store, you can see exactly what their strategy is. Nobody's been able to imitate them. Same with Apple, the same with countless other companies. And that's because strategy is essentially about making choices, making trade-offs, and as we'll see later, tying those choices together into a, um, a, uh, a coherent whole.
You know, fourth, uh, characteristic of a great strategy is fit. It's, it's connecting the activities in the value chain. Uh, it's making the way you do one activity, uh, uh, leverage the way you do another activity. And, uh, this is a, uh, what we call an activity system. This is the IKEA case, and this starts to help to see how the activities at IKEA are mutually reinforcing, and, and how the, the way they do design affects the way they do production, and the way they do production affects the way they do logistics, and the way they do logistics, the way they run their stores, and the way they run their stores affects the way they do design. And it, it, it all, it's all mutually reinforcing. So, to copy IKEA, you can't just copy a feature. You have to copy everything because it's really the whole that produces the advantage. It's not the individual choices. They reinforce, uh, and again, this is another reason why, uh, really good strategies are almost impossible to imitate. You don't just have to imitate one thing. You have to imitate everything. And the company you're imitating has been doing it for a long time, and, and, and you have it, you know, so it's really, really hard, uh, for a coherent, well-thought-out strategy to be imitated. Um, it's easy to copy a product feature. So, if that's what you think your strategy is, "I have this better feature," well, that's not going to work. That's not going to work.
And the final, um, uh, attribute of a, of a sound strategy is continuity. You know, in this, in this world of change, um, you know, we tend to get caught in the trap that we need to be changing the company all the time. And that is true in only one sense. And that is, we've got to be continuously improving operational effectiveness. We've got to continually find better ways of doing things. And, and we have to continually find better ways of implementing our strategy and, and, and, and delivering that value proposition better, and making those trade-offs more clear and, and sharper. So, change is, is continuous. But not change in strategy. Not change in the basic value proposition. Because if you, if you start flopping around on your basic value proposition, there is no way that you'll ever be successful. Because first of all, you won't be good at it. You know, if you're trying to get your organization to deliver low cost one year, and then be differentiated the next year, you'll never get good at it. People will just, their heads will spin. Your, your employees won't know what to do. Your customer won't understand who you are, and what you're trying to offer. You know, your suppliers won't know how to support you. So, strategy requires continuity. And that means that all strategy is essentially a bet, because you've got to stick with it for, you know, two, three, four years to make, to see for it to have the opportunity to be really successful. And, uh, uh, and a lot of people get caught into this trap of agility, you know, and flexibility. Well, don't get caught, you know, because just by being agile, you know, that might make you less bad, but you're not going to be uniquely good, uh, unless you're willing to make a commitment to a direction. And hopefully, you make a commitment to an enduring value proposition where some technological trend doesn't invalidate it, you know, in a year. Uh, but though, but that's the price of a great strategy is, is continuity and sticking with it, and getting your organization to understand it better, and having everybody in the organization able to actually describe, you know, who are we? What's, what's different about us, really, all the way down to the sales force and the service department, and all the, all the, particularly the customer-facing, but even the people that are hidden from the customer, you know, what kind of products should we be developing in our product development organization? Well, in order to answer that question, we've got to understand the strategy. You know, who are we? How are we trying to be unique? Um, and, and, and what we find is that these five areas, if we can get these things, you know, right, then there's a good chance, uh, that we can actually, uh, be superior, uh, and that we can actually sustain that over time.
Uh, you know, at some level, back to the earlier slides, what we, what we're trying to do with strategy is avoid a zero-sum competition where, uh, we're all trying to meet the same needs, and if, if I win, that means that somebody else lost. What we want to do instead is really create a positive-sum competition where we, where companies meet different groups of needs, hopefully uniquely well, uh, and that actually allows multiple organizations to be successful. Uh, it also tends to expand the market because we, we can serve more needs, and we can serve more needs better, and that means that more people get to be served. Um, and there's this kind of simple-minded view of competition, which I, that we, we study and, you know, economics 101, which is that all companies are the same, and they offer the same products and services, and they're kind of homogeneous, and the only way to win is, you know, to be the lowest cost producer. And, and that's, that's fine in, in, you know, like one industry out of a thousand. You know, if you, if you're, but, but even in a commodity industry, it doesn't work that way. You know, you could be a coal company producing coal, but it turns out that, you know, you don't have to differentiate yourself just on the coal. It's also your logistical system, and your delivery, and, you know, there's a lot, lots of ways to distinguish yourself when you see the organization as a complex value chain with lots of opportunities for choices. And we got to get away from the simplistic view that the only, that it's all head-to-head. In fact, that's the opposite of what it really is in order to achieve success.
Now, you know, I won't dwell on this slide, but, you know, what I find even to this day, uh, is that there's a lot of organizations that just don't have sound strategic thinking. They just don't get it. You know, and, and that's because, I think, although it's quite widely, uh, understood now and taught in business schools, uh, you know, there's, there, you know, there's still a long way to go before, uh, everybody kind of understands these basic concepts. And so, a lot of organizations don't have a strategy at all. They just, they just sort of rumbling along, trying to get better every day, and imitating what the other guys are doing, and getting into every new segment of the market that they see pop up. And, you know, and any customer that shows up, they say, "Of course, you know, we'll serve you. You know, we'll meet your needs." And, "Don't never turn down an order." Um, you know, there's a lot of organizations that do that because it's e, you know, part.
Of it is misunderstanding. Part of it is your customers sometimes ask you for things, and you should say no rather than to contort your organization to do something that you're not. You know, and uh, you know, in organizations, there's this kind of punitive view that our whole team should all agree on the strategy. And therefore, if somebody doesn't agree, then we should compromise and give them a little bit of what they want, and a little bit of what I want, a little bit of what you want. And, you know, strategy by consensus is never a good strategy. Strategies about making exquisitely clear choices. Here's what we're going to do. Here's what we're not going to do. Here's what our value is. Here's what our value is not. Here's how we're different. Uh, it's not a compromise, it's it's clarity. And then you can have debate and discussion to come up with the strategy. But then the debate has to stop, and then, and the discussion has to be about how can we do this really, really well. And then maybe, you know, someday, heaven forbid, we're going to have to review whether the strategy is still viable. But except for that discussion, we can't have that discussion all the time. And, uh, one of the big mistakes that CEOs make is they tolerate, uh, doubters in their team who are constantly whining, you know, about the strategy rather than kind of pulling the organization together. So, uh, you know, if this, if you get into a situation where you're building a, a new venture or a business, and, and you've got somebody who just can't get on board, and they've made their case, and you've all thought about it, and you've all agreed, no, this is where we're going to go, that person just has to leave. It's as simple as that. Uh, and this is something again that, that we, we sometimes see leaders, uh, not willing to do.
Capital markets, uh, don't make strategy particularly easy. They're very short-term. They're very focused on, you know, comparing you against everybody else against common metrics, which tends to force you to look like your competitor if you want to score well on the Wall Street metrics. And so a lot of things that really get in the way of strategy. That's why I'd say, you know, I, I'd say less than half of all companies really have a clear strategy, maybe less than 25%. I, you know, I'd never done a study on this, but my own example from my own experience is that, that a lot of organizations get defeated by these things. They don't get it, that they can't do it, uh, they get distracted from it, um, and, uh, they don't have a clear strategy.
Now, uh, let's turn very briefly to, uh, social enterprise or nonprofits, because I suspect that some fraction of you are going to be in that world, uh, and have aspirations in that area. You know, how do we make the, the, the, the mapping between the for-profit and, and, and the nonprofit? Well, I think that the way we do that is we understand that, you know, almost all nonprofits, uh, have a customer. And we have to figure out who that customer really is, and learn to think of who we're delivering services to as a customer. Um, and then all, most all nonprofits are delivering some kind of service. And we have to start understanding what exactly is our service, you know, what's our product, uh, that we're delivering to our customer. And that c, that may be a homeless person, that may be a, um, uh, a, a, a public, a public school. It could be all kinds of different customers. And our products could, you know, be very different. But we have to figure out what we actually offer in terms of services. And, um, you know, a very important point is your funder is not your customer. It's actually the customer is the customer, and the funder is the funder. And, uh, I put this point on there because one of the greatest reasons why nonprofits fail and don't really make any difference in the world is they don't get this point. Rather than figure out who their real customer is and deliver something excellent to that customer, they do what the, they can get funded. And if another funder comes along and wants them to do something a little bit different, then they do that. And most nonprofits have horrendous strategic thinking because all they're pulled in 17 different directions by each of their funders who thinks they have the right to dictate, you know, what the organization does, uh, rather than the organization making that choice and then letting the funder decide whether they want to play or whether they don't want to play. So, uh, this is a very fundamental point in, in the world of nonprofit.
Now, uh, the, the second really critical thing about nonprofits is we've got to start understanding what the goal is. In, in for-profit businesses, the goal is easy. You know, it's kind of set for you, it's profitability, superior profitability. And that kind of unites everybody on what the fundamental purpose is. In a nonprofit, profitability obviously is not the goal. Um, so in a nonprofit, you've got to think of the goal as as value, uh, some kind of social value or societal value that you're trying to deliver. Um, and your goal is not profitability, but your goal is to deliver the highest value you can to the set of customers that you're trying to serve. Um, and, um, so in order to define the value you're trying to deliver, once again, we have to figure out to whom. Um, and then, and then we've got to find ways of defining value and our outcomes in a way that's measurable, so that we can actually tell whether we're succeeding. Um, so, you know, when you're, when you're, when you're an art museum, uh, you know, what's your goal? Well, uh, you're, you're some kind of societal value. Well, there's actually a lot of goals for an art museum that you could set. You could be in the business of collecting and preserving art for, you know, posterity. Uh, you could be seeing your goal as educational. Uh, you could see your goal as entertainment. God forbid, uh, people in the field wrangle at that, but a lot of this is really entertainment. Uh, so what is actually your goal? And depending on what your goal or goals are, you can have more than one goal in a nonprofit, uh, you need to figure out how would I measure that. Um, and so you need the equivalent of profitability in order to to really be clear about excellence in any organization. And, and that's a little bit different in the world of a nonprofit. Um, again, you can use the same concept of the value chain to really describe, you know, what you do. And, uh, this is a value chain for a, a museum. Uh, I once had the privilege of of talking to all the museum directors from across America about, you know, this, this topic. And, um, and, and so we, we drew this up just to give them an idea of, you know, wait a minute, you can think about the world this way too. And, you know, and, and, and you can read this, uh, uh, chart and see that, you know, museums have a value chain. They do stuff and their choices they have to make about how to exhibit and, and, and what kind of hospitality services to provide along with the whatever it is, the art or the culture or whatever they're doing. And, and those are all choices. And different organizations can make different choices depending on who they're trying to serve and, and, and which needs they're trying to meet. And, and the same basic, uh, kind of analytical thinking process applies in the world of of nonprofits.
And, you know, it's particularly hard to develop strategy in the world of nonprofits. And this is just, you know, the, the most common things I see, you know, uh, for, for doing that. Like, you know, nobody's ever really thought of what the goals are. And if they do, they all have conflicting goals because, you know, the staff all have different passions and they want to do different things. And, and the board members who think they are able to choose because they gave money, you know, they have different goals. And the end is, uh, this kind of hodgepodge of of programs. Funders drive us towards a lack of strategy. And so on. Okay. So, uh, I think that, uh, those of you that want to go in the world of nonprofits, if you can actually understand this stuff, you will be indispensable. Because this is a world where we're not delivering value. I'd say, I'd say only one out of 10 nonprofits actually delivers real significant high value. We have a lot of things that are small, fragmented, you know, don't really have impact, not clear, too many different programs, different directions. And the nonprofit world is, is, is ready for epic, uh, improvement. And, uh, it's very hard for these reasons. But if you can get this stuff, uh, in, in one of these organizations and really help, uh, take an organization in this direction, uh, you'll be, uh, truly, uh, indispensable.
Let me just conclude with, with one final slide, and then we'll open it up for, uh, Q&A. Um, and that's the role of leadership. And, um, what I, what I found is, is that, uh, you know, strategy is the ultimate job of leadership. Strategy is the ultimate thing that only the leader can ultimately oversee and, uh, and make those critical choices. Because the leader is the one who has this perspective of the whole. The person in charge of marketing is worrying about marketing. The person talking about service is worried about service. And they look at the world from their discipline. But, but the, the leader, the CEO, the general manager, is the one who can actually see the whole the easiest. Um, and, uh, therefore, you know, ultimately the leader has to be the architect of strategy and, and, and make the choice at the end of the day with a lot of participation, uh, uh, by the team. Um, you know, leaders have to communicate the strategy. You know, having a strategy written down and put in a safe and kept secret defies the very purpose of strategy. The purpose of strategy is alignment. It's to get everybody in the organization to figure out what they're supposed to do in their role to advance the company. And, uh, you know, um, with a, with a clear strategy, uh, people make those choices well. But without a strategy, the leader has to run around and second-guess and teach everybody, tell everybody what to do. And that's just impossible. So, um, strategy is your critical alignment tool to make sure everybody's, you know, rowing in sync, and, and on the right river, you know, heading to the right place. Um, so that at the end of the day, you'll truly be unique. And so, uh, leadership, um, is about choosing strategy, but it's also about communicating it. It's also about enforcing the strategy, avoiding distraction, avoiding imitation, avoiding, uh, you know, uh, trying to please people that we shouldn't try to please. And, and that is what great leaders do. They really keep the organization on point, on focus, on direction. Um, and, um, and, and, and help the organization, uh, move ahead. Um, I can tell you, any organization that has a clear strategy, it gives you a tremendous boost of energy. People want to be part of something different. They want to be distinctive. They want to be part of an organization that's changing the world in some sense of that word. And, and, and having a clear strategy, rather than just kind of copying what everybody else is doing, is, is really a powerful force there. So, um, uh, let me, let me stop there and hope that this has given you some of the key ideas. Let me turn it over to Buck or, or, or Holden to kind of manage the, the 15 minutes or so we have remaining. Thank you. [Applause] Great Mike, thank you so much. Fabulous. So we have some for students to submit questions. Unprobably kick some of those questions. Begin and ask you what the places you spend some time is with the Cleveland Clinic. And obviously, healthcare is one of the huge issues facing the country right now. So could you just talk a little and its impact? Think about healthcare. Uh, Buck, you were breaking up a little bit, but I think the question was about healthcare and strategy in healthcare. Uh, me, yeah, okay. Um, okay. Uh, and specifically the Cleveland Clinic, does that what you said? Yes, okay, good. Well, I, again, I think that the healthcare, uh, is an example of of of this. The starting point for, I think, understanding healthcare, healthcare strategy, is to think about what is the goal of healthcare. And, um, the goal of healthcare, uh, in, in our way of looking at the world, is to deliver superior value to the patient. And value is the outcomes that the patient achieves for whatever medical problem they have, uh, related to how much it cost us to actually deliver those outcomes. Uh, and, um, uh, you know, from there, we then have to, uh, ask ourselves, well, how would we configure a strategy for a delivery organization to actually deliver the maximum value, uh, for the patient for a particular medical problem? And, uh, there's a whole, you know, framework that that that that grows out of that and a whole set of choices that delivery organizations need to make. The Cleveland Clinic is a wonderful case because because they very much are a value-based organization. Uh, they measure outcomes, uh, all across the organization, and they reorganized their care delivery process around the patient's needs rather than in the traditional model of medical specialties. So instead of the patient having to go from one specialist to another, uh, they put the specialists for dealing with, uh, you know, uh, cancer in the same organization. And the patient then is served by a team, uh, that is, uh, that is responsible for delivering the best outcomes and doing it the most efficiently. So that's kind of a very high-level view. There's a series of articles and and a book about this, and anybody in the room that's interested in healthcare, uh, we'd be happy to send you some references. It's a vitally important topic. We have not had a solution to this problem, but I think we've now started to see how to go forward here. Great. Thanks. Another question comes, uh, could you give a specific example about some nonprofit, uh, organizations and how they've, uh, adopted or strategic thinking or some of your strategy? We have a lot of people interested in nonprofit here. Well, you know, I, we have a lot of depth of case studies, uh, certainly in my group on on nonprofits, and, and I'm sure that, uh, we have a course, we have courses and curriculum on on social enterprise at HBS, and all of them talk about strategy. Uh, and I'm sure there's great cases of. I mean, just, um, um, uh, you know, an interesting example that comes to mind, given some other work I've done, is an organization called Technoserve, uh, that has started to understand that they're really focused on, uh, dealing with small producers in developing countries, you know, small farmers and other small producers, and how can we improve the the lives of those of those producers? And they've started to understand that that what really fundamentally defines value for what they do is, you know, can they really, uh, boost the actual incomes, sustainable incomes of their of the populations that they're setting out to serve? And, and, and can they do that at at at with reasonable efficiency? And, uh, and they've developed, of course, a lot of skills in in working with small farmers and helping them improve their yields and improve their quality and, and improve the supporting infrastructure. Uh, and they, and they, they really are one of the pioneers in the nonprofit world of understanding that, yes, there's a lot they can do as a nonprofit, but what if they teamed up with for-profit companies, uh, like Unilever or like Nestle, that were doing procurement in, uh, from small farmers in rural areas? And, and, and so Nestle, so Technoserve now works very, very tightly connected to the leading kind of agricultural, uh, uh, procurement companies and food companies in the world to actually deliver these services. So they really multiply, uh, the value that they can deliver because they can then engage the Nestle of this world in in providing financing and, and, and helping sort of guarantee purchasing based on certain quality specifications. And that allows, uh, all kinds of other good things to happen. So I think Technoserve would be would be a wonderful example. It's not just a bunch of, you know, people going out and trying to do good. You know, they thought very, very deeply about, you know, okay, what, what is the value equation for that organization? Who is their real customer? In their case, it's these small farmers in, in rural communities, uh, and then how can they best configure themselves to deliver value, uh, both in terms of their staff, but also the kind of partnerships they develop, uh, in order to kind of multiply and leverage and scale, uh, the impact they have. So that would be one example. Book. Great. One last question. Uh, looks like a a fat pitch. Somebody, Jim Collins, and Good to Great says, a great company is simply a function of good leaders choosing great people, and strategy will follow. Do you agree with that? No. Uh, I, I think, you know, Jim has done great work, but, but Jim's work is more about internal organization and how you motivate people and, and how you get people, you know, inspired and engaged. And, um, and of course, that's really, really important. But, but I think, uh, you know, ultimately, uh, the strategy doesn't really take care of itself. Uh, it, it's really hard to have a strategy. And, uh, you know, Apple is is great not because of internal things that happened, because, you know, Steve Jobs had a very clear, sort of almost rebellious idea of what a that company was going to be. And it had a lot of choices, like, you know, design and higher price and, uh, and, and a, and a certain kind of functionality and, and, and a willingness to kind of give up the conventional, uh, uh, concept of certain product categories. And, uh, uh, and, and that was fundamentally, I mean, yes, some of those ideas, you know, came up from from below, but it wasn't just an incoherent set of ideas. It was a coherent view of how Apple was going to distinguish itself in the marketplace. And, and, and that's not to say it's the only way to compete in their business. There are other companies that deliver great value doing something totally different. But, uh, ultimately, I, I don't think we can, we can rely on, you know, just motivated people, uh, coming up with strategy. If, if we're not careful, motivated people will make it even harder to have a strategy because everybody will be so excited, they'll want to do the things that they're passionate about. And, um, so the key is getting alignment. And I think that's where Jim is really under, under, uh, under, uh, under valuing the need for, uh, a, a, a, a leadership team to really define the fundamental direction and purpose, um, and then hopefully motivate the people and attract them around that purpose. Wonderful. So Mike and I were talking right, day or two ago, and he said maybe he could come down in the spring around the time of the Carolina Duke game. And, uh, Mike, we have the director sitting on the front row here. So, uh.