Strategy Under Competition and Uncertainty

Strategy begins with an honest diagnosis#

Most organizations that say they have a strategy have something else: a fuzzy outline of long-term goals, pursued reactively one day at a time. Richard Rumelt, who has advised organizations from small start-ups to multinational conglomerates, several governments, and the U.S. Department of Defense, builds Good Strategy Bad Strategy on that observation. His definition is compact: good strategy is the effective application of strength against weakness, either your own weakness, in order to fix it, or a rival's, in order to gain an edge. Good strategy recognizes the true nature of a challenge and finds a way to overcome it. Bad strategy leaves you blind to your challenges and chases unattainable goals without a workable plan.

From this follows what Rumelt calls the first truth of strategy: simply having one is already a strategy. Because most rivals in an industry face the same challenges with only vague intentions, an organization with a well-thought-out, specific strategy is better prepared than they are. His example is Apple's turnaround. When Steve Jobs returned as CEO in September 1997, Apple was losing market share to Microsoft and heading for failure. Within a year he had cut the company back to a simplified, small, strong core and eliminated anything that did not serve it. He identified the fundamental problem, that the company was unfocused, and then built a coordinated set of actions around that diagnosis, instead of trying a bit of this and a bit of that as his predecessor had done.

A.G. Lafley and Roger Martin reach a similar conclusion from inside a company. Working together at Procter & Gamble between 2000 and 2015, Lafley as CEO and Martin as a consultant, they developed what they call the strategic choice cascade; the Shortform guide renames it the waterfall strategy, and this article follows that usage. They report that the approach doubled P&G's sales and market capitalization. The cascade asks company leaders five questions, each building on and refining the previous answer while leading into the next:

1. What is your company's vision and purpose, or winning aspiration?
2. What are your target markets?
3. How do you succeed in those markets?
4. What capabilities does your company need in order to win?
5. How should you manage your company in order to achieve its purpose?

Later sections treat each question in turn. Shortform adds a warning about how to answer them: pursuing too many options, or options that work against each other, is a common reason strategies fail, so the goal is a few specific choices that together form a clear, cohesive strategy. Lafley and Martin also insist that everyone from the CEO to a retail salesperson makes strategic choices. In a large company many strategies run at once and in conversation: one employee's choices feed a brand strategy, which connects to a sector strategy, which forms part of the company strategy. They call this a nested cascade, a waterfall made of smaller waterfalls. Whatever your position, they argue, you should make every choice in order to win, not merely to compete, because more aggressive and strategic rivals will otherwise defeat you.

Shortform sets Simon Sinek's The Infinite Game against that competitive framing. Sinek argues that business cannot be won: it is an infinite game, an ongoing process without a final winner, unlike finite games such as sports, which end with winners and losers. Infinite games require different mindsets and strategies. Sinek's recommendations are to focus on sustainability, because the best strategies are the ones you can sustain indefinitely; to embrace flexibility, pursuing innovations and opportunities that make the company stronger, more resilient to market shocks, or more adaptable, rather than specific plans to beat opponents; and to take the long view, worrying more about long-term success than short-term profits. The disagreement is real but bounded: both camps want focused choices; they differ on whether "winning" is the right name for the goal.

Sources and editorial comparisons: Good Strategy Bad Strategy, Playing to Win.

Bad strategy, in Rumelt's account, is not the absence of strategy and not a good strategy that happened to fail. It is poorly thought-out strategy built on misconceptions and misguided leadership, and it has recognizable features. He names four:

1. Fluff. Grandiose phrasing and vocabulary create an illusion of expertise.
2. Failure to identify the challenge. The specific challenge is never defined; a problem you have not named cannot be addressed.
3. Conflation of goals with strategy. Profit or performance targets stand in for methods of overcoming the challenge.
4. Misguided strategic objectives. Scope is never narrowed, so too many objectives compete; or the objectives chosen are unrealistically ambitious and come with no useful guidance on how to reach them.

Rumelt traces these features to three causes. The first is the inability to choose between competing values and priorities. Complex organizations often refuse to pick among their diverse internal interests, which is what a focused strategy requires. Digital Equipment Corporation, a computing pioneer, had a CEO who could not reconcile the competing priorities of three top executives; rather than choose one, he tried to incorporate all three visions, produced an unfocused strategy, and the company floundered until rival Compaq acquired it. The second cause is the lure of strategy-by-template: fill-in-the-blank tools with generic prompts that invite vague statements of ambition instead of an analysis of challenges and solutions. The familiar template asks for a vision (where do you see the company in the future, usually answered with "the best" or "most profitable"), a mission (a purpose, often lofty, mentioning passion and innovation), values (non-controversial ones such as respect and integrity), and "strategies" (goals and subgoals relabeled, with words such as portfolio and management). The third cause is the false promise of positive thinking: leaders center their strategy on motivational, can-do language, as if wanting success strongly enough were the decisive element. Ambition alone does not propel a company. Rumelt's example is that Steve Jobs is often praised as a visionary, yet ambition mattered less to Apple's early success than competence and a specific competitive advantage: the technical development that let the Apple II connect directly to a floppy disk drive instead of using expensive controllers.

Sources and editorial comparisons: Good Strategy Bad Strategy.

What replaces fluff is a structure Rumelt calls the kernel, the basic underlying structure that unites thought and action. It has three elements, kept here in his order:

1. Diagnosis: a definition of the challenge and its most critical aspect. People often disagree about the right diagnosis, and a leader's job is to recognize that and look for a better one when needed. When IBM struggled in the early 1990s, many said it was too integrated and should break itself up into narrower specialists. Its CEO diagnosed the opposite problem, not too much integration but too little: a lack of internal coordination between teams. Solving that problem let IBM regain dominance as an integrated provider of customer solutions.
2. Guiding policy: a clearly outlined approach for coping with the diagnosed challenge. It draws on the organization's sources of advantage and focuses effort on targeted objectives that meet the challenge. Wells Fargo's corporate vision aims to satisfy all of its customers' financial needs, and it supports that ambitious goal with a guiding policy of cross-selling.
3. Action plan: a set of actions that work with each other to carry out the guiding policy. It defines resources, policies, and movements that support one another. A company whose advantage is being a low-cost retailer will have interrelated policies for sales, marketing, distribution, and design that mutually reinforce keeping prices low.

Lafley and Martin's first waterfall question sits upstream of the kernel: what is your definition of success, the winning aspiration or ideal future for the enterprise? Their answer should encompass the company's purpose, but it is not only a statement of purpose; it is also a statement of what winning would look like. Shortform adds a check from a Harvard Business Review argument about business plans: a winning strategy must address three perspectives, the customer (who is buying the product), the investor (who is covering the costs), and the producer (who is making it). Many plans fail because they consider only the producer's view, gushing about groundbreaking technologies and revolutionary ideas while overlooking that people must invest in those innovations and, more importantly, that people must want to buy them. Read together, the two books give a diagnosis a place to start (what would success be, and for whom) and a discipline to finish (what exactly is the challenge, what policy answers it, and what coordinated actions follow).

Sources and editorial comparisons: Good Strategy Bad Strategy, Playing to Win.

Before choosing a position, Michael Porter asks you to understand the market you are in. Competitive Strategy, first published in 1980 by the Harvard Business School professor and economist, revolutionized strategic management and remains a standard reference for leaders in complex, competitive environments. The Shortform guide organizes it into three parts: five factors that shape a market's competitiveness and profit potential, four research areas for anticipating competitors, and three strategies for managing the five factors; the guide also adds research from management professionals and suggested applications. This article follows the same three movements, and keeps the guide's plain names for the five factors, which are interdependent:

1. Supplier influence
2. Buyer influence
3. New competitors
4. Alternative offers
5. Rivalry competitiveness

Supplier influence is the first. Suppliers with substantial influence can dictate pricing, product quality, and availability, potentially limiting competition and profitability downstream. In the diamond industry, a few large mining companies exert that kind of influence over jewelry manufacturers and vendors by dictating prices, setting quality standards, and restricting sales. Porter lists conditions that strengthen suppliers:

• Limited supplier competition with no substitute goods. When only a few suppliers make a vital component, they can dictate terms because there is no alternative; a single pharmaceutical company that manufactures a vital compound for a drug controls that compound's price and availability. Shortform notes that Thomas Sowell (Basic Economics) calls this a monopoly, when one supplier gains exclusive control of a market, or an oligopoly, when a small number of large suppliers dominate it and can limit new entrants. Sowell adds a further drawback beyond dictated terms: innovation declines when competitive pressure is absent.
• Dependency of larger or more profitable markets on the same suppliers. A supplier serving bigger or richer markets can dictate to a smaller or less profitable one, because the smaller market relies on it while it thrives independently. Suppliers of rare earth minerals bargain from strength because both the renewable energy market and the commercial electronics market demand their output. Shortform suggests a supply chain analysis to find out which other markets depend on your suppliers: map the chain from raw material sourcing to end-product delivery, assess each supplier's role in that ecosystem, and judge how critical its products are to those other markets.
• High costs of switching suppliers. A supplier whose clients have invested in infrastructure modifications gains leverage, because switching would require further costly modifications. A manufacturer that customized its production machinery for one supplier's components is at that supplier's mercy. Shortform cites Ashlee Vance's Elon Musk for one escape: manage key production processes and sourcing in-house, allocating resources, establishing internal departments, and building the capabilities to handle manufacturing internally, which reduces dependence on external suppliers and increases control over the supply chain.

Sources and editorial comparisons: Competitive Strategy.

Buyer influence is the second factor. Influential buyers shape what businesses offer, how they price, and overall market demand. Smartphone buyers, for example, exert significant influence because they can readily switch brands to get particular features or lower prices. Porter's conditions for strong buyers, each paired in the guide with an example and a Shortform response:

• Many sellers or substitute offers are available. Buyers with a wide range of options purchase according to preference and budget; a moisturizer shopper can choose among many brands or switch to cheaper substitutes such as natural oils or homemade alternatives. Shortform notes a drawback on the buyer's side: Rolf Dobelli (The Art of Thinking Clearly) describes decision paralysis, where an overwhelming number of choices produces information overload that hampers decision-making. A buyer choosing a smartphone from numerous options may find it hard to select one that fits their requirements and end up with buyer's remorse.
• Revenue depends on a small number of buyers. When a few retail chains or buyers account for much of a market's revenue, sellers grant them power to keep the relationship; a few large grocery chains can negotiate terms and conditions on that basis. Shortform sees one upside: with few key buyers, sellers and buyers can collaborate more closely on product development, marketing, and supply chain integration, producing joint innovation, better offerings, and shared growth.
• Switching from one seller to another is cheap. If leaving costs little effort or money, an unhappy buyer simply finds a replacement; platforms such as Amazon let buyers compare prices and reviews for free and pick the best value. Shortform cites Ken Blanchard and Sheldon Bowles (Raving Fans): businesses can counteract low switching costs by nurturing loyalty and trust, emotional benefits that they argue weigh more in customers' minds than the value gained by switching. The key, according to them, is consistently creating personalized experiences that exceed expectations.
• Buyers know supplier costs and market prices. With access to market data, buyers seek the best deals; price comparison websites let electronics buyers negotiate cheaper prices or better contracts. Shortform notes that you cannot stop customers from seeing market data, but you can use it to build trust through transparent pricing: being open about price trends, fluctuations, and the factors behind pricing decisions signals that you have nothing to hide and are committed to providing value.

Sources and editorial comparisons: Competitive Strategy.

New competitors are the third factor: how easily newcomers can enter and compete against established businesses. Markets pose different levels of challenge, and those levels affect both competition and the potential for disruption. In e-commerce, storefront technologies and global shipping infrastructure make entry easy, while saturated markets pose challenges such as building brand recognition and establishing trust. Porter says entry is easier under these conditions:

• Low entry costs: reduced capital requirements and financial barriers.
• Absence of significant barriers: no substantial legal, regulatory, or technological obstacles.
• Favorable government policies: initiatives that promote competition, reduce regulation, or offer incentives to new entrants.
• Accessible distribution channels: open channels such as online platforms or partnerships with established distributors.
• Limited competitive advantage: established businesses lack cost or quality advantages that are hard to replicate, so newcomers compete on an equal footing.

Shortform's sidebar reads the same list from the entrant's side, arguing with W. Chan Kim and Renée Mauborgne's Blue Ocean Strategy that creating value in uncontested market space can get around each unfavorable condition. Against high entry costs, a business can redefine industry boundaries with a new business model: ride-sharing entrants such as Lyft and Uber cut entry costs by using personal vehicles instead of building expensive fleets. Against significant barriers, untapped market space avoids the obstacles of crowded industries: Airbnb got past zoning restrictions and licensing requirements in traditional hospitality by facilitating short-term home rentals. Against unfavorable government policy, value innovation can attract support aimed at entrepreneurship and growth: Tesla Motors attracted incentives and subsidies through its electric vehicle technology and sustainability commitment. Against inaccessible distribution, alternative channels and partnerships open new routes: Warby Parker partnered with established optical stores so customers could try on frames before buying online. Against strong incumbent advantage, uncontested space diminishes the value of what incumbents have: Blue Apron's unique recipes and pre-portioned ingredients reduced traditional grocery stores' advantage in meal preparation. The examples are illustrative cases chosen by the guide, not a claim that any of these companies has permanently escaped competition; the article on blue ocean choice below gives the underlying method.

Sources and editorial comparisons: Competitive Strategy.

Alternative offers are the fourth factor: buyers may purchase from other markets entirely, cheaper or better-quality offers that perform the same function. In the automobile market, that possibility appears whenever customers find it more convenient or cost-effective to give up owning a car for public transport or ride-sharing. The likelier such switching is, the more competition intensifies, market demand falls, and businesses are forced to lower prices. Shortform suggests treating substitutes as partners rather than only threats: the 2016 Toyota-Uber collaboration let Toyota reach beyond conventional car sales by embracing ride-sharing, gave Uber drivers access to high-quality vehicles at affordable rates, and helped both companies meet changing transportation needs.

Rivalry competitiveness is the fifth factor. The intensity of competition among existing rivals dictates how much businesses must invest to acquire and retain customers; in fast food, rivals continuously fund new product development, promotions, and expensive mass-marketing campaigns to capture share. Porter says rivals compete more aggressively when:

• The market is saturated with businesses offering similar products, as in smartphones. Shortform adds William Luther's (The Marketing Plan) observation that saturation occurs in the late-growth-to-decline stages of a market's life cycle, when most customers already own a version and attention shifts to innovative alternatives (people stopped buying cassettes in favor of CDs). Businesses then try to clear inventory fast to fund the next thing, sometimes by slashing prices below what competitors can match.
• Fixed costs are high, as with airlines' aircraft purchases and maintenance, so companies compete hard to cover them. Shortform notes the opposite response: Air France-KLM, Delta Air Lines, and Virgin Atlantic Airways collaborate on transatlantic routes to share costs, optimize operations, and offer travelers more flexibility.
• Market growth is slow, as in declining print media, so businesses fight over the existing customer base. Shortform points to consolidation as an alternative: large, well-equipped companies acquire struggling smaller ones and pool expertise and resources.
• Offers are undifferentiated, as in bottled water, forcing aggressive marketing and price wars. Shortform cites business experts who see the problem extending to companies themselves: customers perceive no difference among the firms competing for their attention, so the remedy is a holistic distinctiveness of brand identity, values, and customer experience, not just of product.
• Exiting the market is difficult because of heavy investment or contractual obligations, as in telecommunications infrastructure, so companies compete fiercely to recoup costs. Shortform's counterexample is repositioning: when IBM faced challenges exiting the PC market, it sold the division to Lenovo and focused on software and consulting, letting Lenovo run the PC business rather than fighting on.

Shortform closes the factor analysis with two alternative frameworks. SWOT (strengths, weaknesses, opportunities, threats) examines internal strengths and weaknesses alongside external opportunities and threats, emphasizing capabilities and market dynamics together. PESTEL (political, economic, sociocultural, technological, environmental, legal) focuses on macro-environmental forces. Combining them with Porter's five factors, the guide argues, yields a more complete picture of the competitive landscape.

Sources and editorial comparisons: Competitive Strategy.

Understanding the market's structure is half of Porter's diagnosis; the other half is understanding specific competitors. Research on them pays off twice, by enabling effective countermoves to their strategies and by helping you anticipate their responses to yours. He suggests four research areas: competitors' objectives, their self-perceptions and decisions, their current approaches, and their strengths and weaknesses.

Objectives. Knowing what a competitor is trying to achieve tells you whether it is satisfied with its performance and position, which predicts its reaction to shifting conditions. If a competitor aims for 30% market share and holds 10%, assume it is dissatisfied and will react aggressively to any threat to its growth plans. Objectives also reveal overlap: where your goals align with a competitor's, expect intense future competition, as when several rivals plan to expand into the same segment at once and end up targeting the same customers with similar campaigns; where goals diverge, there is room to differentiate, as when competitors chase the cheapest products and you can position as a premium brand for customers who want the most innovative ones. Shortform lists ways to learn objectives: examine annual reports, press releases, investor presentations, and public statements; watch job postings and hiring trends for investment in particular skills or markets; attend trade shows and follow presentations and announcements; track key personnel changes such as new leadership or strategic roles; stay informed about partnerships and collaborations; and talk with mutual customers and suppliers. The guide also notes, as Porter's alignment point implies, that shared goals can pave the way for alliances.

Self-perceptions and decisions. How competitors see themselves reveals their assumptions and decision patterns. A competitor that perceives itself as affordable may assume price drives purchasing and therefore prioritize cost reduction over innovation. Those assumptions expose market needs the competitor overlooks: because it cuts costs rather than innovating, it neglects customers who value superior quality, which is an opportunity to fill a gap and avoid direct competition by positioning as a premium brand. Shortform explains the mechanism through bias. Confirmation bias leads competitors to seek and interpret information that confirms their existing beliefs, over-weighting factors such as price. Anchoring bias fixes decisions on one idea, such as being the affordable option, and limits consideration of alternatives such as innovation or quality. Availability bias makes them rely on readily available information or past experience and miss emerging trends or changing preferences. To assess self-perception, the guide recommends social listening (patterns in messaging, tone, and the language used about their brand and products), interviews with current or former employees and industry insiders, attending industry events to hear how they present themselves, and analyzing brand aesthetics such as logos, color schemes, and taglines.

Sources and editorial comparisons: Competitive Strategy.

Current approaches. Researching how competitors organize resources and operating procedures to meet their objectives lets you monitor how well their strategies work and anticipate strategic shifts. If a competitor prioritizes exceptional customer service and allocates heavy resources to satisfaction and retention, tracking its high satisfaction and retention rates confirms the strategy is working and predicts it will keep the customer-centric focus. Shortform supplies a fuller instrument from Alexander Osterwalder and Yves Pigneur's Business Model Generation: nine questions about a competitor's business model, each paired with a way to judge how well that part is performing.

1. Who are its customers? A children's book seller probably targets parents and preschools. Judge targeting by customer feedback and sales within those segments.
2. What channels does it use to communicate, sell, and distribute? Online advertising, an e-commerce store, the postal system. Judge by click-through rates, conversion rates, and sales attributed to each channel.
3. What customer relationships does it establish? Fully personalized one-on-one service, or automated service with no dedicated representatives. Judge by churn rates, satisfaction surveys, and the quality and responsiveness of support interactions.
4. What value does it offer? Smallpdf.com offers free and low-priced PDF services to people who do not want a traditional subscription. Judge by subscriber growth, customer feedback, and engagement metrics.
5. What resources does it rely on? Material (specific equipment), monetary, intellectual (copyrights or patents), and human (employees or specialists). Judge by production costs and inventory turnover.
6. What partnerships does it rely on? Four types: between non-competitors (eBay and PayPal), between competitors (Apple and Microsoft's patent-licensing agreement), joint alliances (Ford and Toyota developing hybrid trucks), and buyer-supplier alliances (Samsung supplying Apple). Judge by the partnerships' effect on market share, revenue growth, and customer satisfaction.
7. What are its core activities? Production, troubleshooting, or infrastructure management. Judge by the category's key indicators; for a troubleshooting-focused competitor, complaints, response times, and resolution rates.
8. How does it make a profit? Single or recurring transactions; fixed or variable prices. Judge by revenue churn and the pricing strategy's effect on acquisition and retention.
9. What are its costs? One-off production and distribution costs, or ongoing costs such as salaries and rent. Judge by financial statements, cost of goods sold, and production cost per unit.

Strengths and weaknesses. The fourth area identifies where a competitor has an advantage that will be hard to overcome and where it is vulnerable. A competitor with a strong distribution network and loyal customers will be hard to poach from, but if its online presence is limited, digital marketing can reach the online customers it cannot. Shortform's methods: look for vulnerabilities that are not immediately apparent, such as dependence on a single supplier, compliance issues, or organizational weaknesses; survey and interview their customers about what they value and where the competitor falls short; read reviews, ratings, and social media sentiment for reputation risks; analyze supply chain, production, logistics, and customer service operations for excellence or inefficiency; assess R&D, product launches, and investment in emerging technologies to gauge capacity to innovate; and examine financial statements, debt, and cash flow to judge the ability to invest in growth, withstand downturns, or respond to shocks.

Sources and editorial comparisons: Competitive Strategy.