# Lords of Strategy  ## Metadata - Author: [[Walter Kiechel III]] - Full Title: Lords of Strategy - Category: #books ## Highlights - three Cs central to any good strategy: the company’s costs, especially costs relative to other companies; the definition of the markets the company served—its customers, in other words—and its position vis à vis competitors. ([Location 87](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=87)) - Tags: [[blue]] - According to his schema, the first phase of strategy’s history, from its beginnings in the early 1960s until approximately the mid-1980s, was about positioning. ([Location 197](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=197)) - Tags: [[blue]] - In strategy’s second stage, extending from the late 1980s to today, its intellectual focus turned to processes, the procedures and routines by which companies get things done. ([Location 200](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=200)) - Tags: [[blue]] - Occupying the broader middle ground between these two is a school that maintains that people are the key to innovation, and innovation the modern requisite for competitive success. ([Location 211](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=211)) - Tags: [[blue]] - The tamer, more conventional way of framing this tension is to see the history of strategy as a struggle between two definitions, strategy as positioning and strategy as organizational learning. ([Location 221](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=221)) - Tags: [[blue]] - The positioning school, led by Harvard’s Porter, sees strategy making as the choice of where you want to compete, in what industry and from what spot within that industry, and how—on price, with distinctive products, or by finding a niche. ([Location 222](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=222)) - Tags: [[blue]] - The organizational-learning school, by contrast, maintains that no company that’s already up and running can choose its strategy as if it had a blank slate. Almost gleeful in its derision of the positionists—at least its leading spokesman, McGill’s Henry Mintzberg is—the learning school also argues that virtually no strategy ever works as originally planned. The point, they say, is for the company to set off in one direction, learn from the response it gets from markets and competitors, and then adjust accordingly. ([Location 224](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=224)) - Tags: [[blue]] - Bruce Henderson was also an elitist. ([Location 249](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=249)) - Tags: [[blue]] - He wanted the smartest of the smart, and to attract them he was prepared to overlook what might have seemed obvious liabilities. Of the first seven professionals at BCG, only one besides Henderson had any consulting experience. ([Location 252](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=252)) - Tags: [[blue]] - First among the duties of the modern CEO, whatever else this exalted figure does, is the framing and enunciating of the enterprise’s strategy. ([Location 262](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=262)) - Tags: [[blue]] - The elitism that Henderson-style strategy making brought with it represents one of the big reasons so many otherwise well-informed businesspeople hate consultants. ([Location 267](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=267)) - Tags: [[blue]] - this ever since strategy helped the world discover that the only real purpose of a company is to rack up gains for shareholders. ([Location 277](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=277)) - Tags: [[blue]] - So, in the latest turn of its wheel, strategy becomes about how to make existing institutions as innovative as start-ups. ([Location 287](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=287)) - Tags: [[blue]] - Engineering degrees were to become the standard credential for the lords of strategy. ([Location 317](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=317)) - Tags: [[blue]] - Henderson spent the next eighteen years at Westinghouse, working in purchasing much of the time, being promoted to corporate vice president in 1953. But for all his long tenure and seeming success, neither the man himself, the written record, nor the recollections of his BCG colleagues have much to say about what he did or learned there. ([Location 338](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=338)) - Tags: [[blue]] - “Nearly all companies I have known,” he would say in 1985, “have a number of businesses they should not be in.” ([Location 357](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=357)) - Tags: [[blue]] - Norton thus posed for the consultants the first example of a kind of case they would encounter repeatedly, soon to be classified under the heading market segmentation. Looking at the universe of markets you serve, all the customers to whom you sell different products or services, how do you carve up the totality to figure out where you make money and where not? By customer? Product? Geography? Some combination of the three? (Anyone who asserts “You just take the cost of the product and subtract it from the price” has never worked in a large organization.) ([Location 404](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=404)) - Tags: [[blue]] - The initiatives also marked the beginning of a shift in how consultants were to compete: BCG was going to build its practice around the drawing power of its ideas, not on its storied history or the time-honed expertise of its senior partners. ([Location 422](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=422)) - Tags: [[blue]] - The first tool was what became known as BCG Perspectives, short, punchy essays—eight hundred words, typically—on a new idea or a nagging business question, published in a brochure format just the right size for tucking into a coat pocket. ([Location 424](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=424)) - Tags: [[blue]] - In the decades that followed, BCG published over four hundred Perspectives—at the height of popularity, up to fifteen a year—with some partners calculating that the essays eventually reached an audience as large as that of Business Week. ([Location 434](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=434)) - Tags: [[blue]] - Henderson’s sentences are simple, declarative, unadorned, almost deadpan in their calm. “A businessman can predict his normal costs far into the future if he understands their basic relationship to experience.” ([Location 436](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=436)) - Tags: [[blue]] - Even colleagues whom he drove crazy in other ways describe Henderson as a good writer, and he worked at it, revising each Perspectives article ten or fifteen times, polishing his own efforts with professional help. Of the six people on staff at the end of 1964, one was a full-time editor. ([Location 439](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=439)) - Tags: [[blue]] - The other notable marketing innovation introduced in 1964 was the by-invitation-only business conference. ([Location 454](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=454)) - Tags: [[blue]] - For the killer account of the shortcomings of planning, readers should consult one of the magisterial works of modern management literature, The Rise and Fall of Strategic Planning, by Canadian scholar Henry Mintzberg. ([Location 471](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=471)) - Tags: [[blue]] - “Profit from the Learning Curve,” by a professor of chemical engineering, Winfred Hirschmann. As Hirschmann noted, as early as 1925, manufacturers of aircraft had begun to observe that the amount of labor that went into making an aircraft declined predictably as the number of planes manufactured increased. ([Location 587](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=587)) - Tags: [[blue]] - Hirschmann and others concluded that the explanation lay in learning—hence the name learning curve—but learning not just by individuals (the kind of progress that Frederick Taylor would clock on a stopwatch), but rather by the organization as a whole (which was going to put the Greater in Greater Taylorism). ([Location 596](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=596)) - Tags: [[blue]] - BCG would speak of a company’s or industries’ accumulated “experience.” With each doubling of experience, costs and prices should decline by a predictable amount, typically between 15 and 25 percent. ([Location 612](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=612)) - Tags: [[blue]] - BCG posited a direct relationship between a company’s position on the experience curve—and hence its costs—and its market share. The competitor with the largest share, the one that sold more of the product than anyone else did, should be the one with the most “experience.” ([Location 614](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=614)) - Tags: [[blue]] - The essential insight here was heartening or terrifying, depending on how your company was situated: the market-share leader should be the low-cost producer in any industry. Provided that it continued to churn out more units than any other competitor and thus drive down the experience curve faster, that company should remain the low-cost producer forever and ever, amen brother. ([Location 617](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=617)) - Tags: [[blue]] - The call-to-action message, shocking to many at the time, was that you couldn’t truly understand how you were doing in a business or likely to do unless you understood exactly how you stood vis à vis your competitors. ([Location 623](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=623)) - Tags: [[blue]] - the proportion of U.S. workers who labored in manufacturing peaked in the early 1940s, at 32 percent; today, it’s less than 10 percent, a seeming historical inevitability that ought to be borne in mind by those shocked to discover the migration of “good American jobs” overseas.) ([Location 641](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=641)) - Tags: [[blue]] - The worry at the time was not about how these giants might be buffeted by the forces of competition, but rather that their power was too largely unchecked. ([Location 645](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=645)) - Tags: [[blue]] - Government responded to the threat, or the snub. In 1950, Congress passes the Cellar-Kefauver Act outlawing mergers that reduced or lessened competition “in any line of commerce.” ([Location 649](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=649)) - Tags: [[blue]] - Up through the early 1960s, Washington threatened behemoths such as AT&T and IBM with antitrust action aimed at curbing their market power. ([Location 652](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=652)) - Tags: [[blue]] - the one hundred largest industrials were to reach the summit of their puissance in 1974, when they accounted for more than a third of U.S. economic output. By 1998, their share was half that. ([Location 655](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=655)) - Tags: [[blue]] - The problem was that such intellectual engagement didn’t necessarily lead to a consulting engagement. ([Location 872](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=872)) - Tags: [[blue]] - The philosophical underpinning of his recommendation “was balancing operating risk and financial risk.” If you had a low level of operating risk, as timber companies did, “beef up the financial risk by the use of debt, to get to the appropriate level of debt for the business.” ([Location 900](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=900)) - Tags: [[blue]] - “It occurred to me that the savings account is the growth business; it automatically compounds, but you get no cash out of it. The bond is your stable market-share business that’s throwing off cash and an equal amount of earnings and maintains its value over time. The mortgage is the business that’s declining, and the way you should manage it is to pull cash out.” ([Location 958](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=958)) - Tags: [[blue]] - Bain notes that in this period, the late 1960s and early 1970s, the typical BCG assignment lasted perhaps six weeks, culminating in a written report to the client. He became frustrated by the fact that the consultants would hand over the report and then leave, not checking back later to find out if anything came of it. Moreover, in contrast to the corporate planners, the real decision makers seemed to be reading only the executive summaries. He began wondering if the BCG consultants might not be writing up their exquisite reports—rich with surprising insight, supported by terrific data—more with an eye toward impressing colleagues than out of any concern with what the client might do with the findings. ([Location 1242](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1242)) - Tags: [[blue]] - The short-term, usually one-off nature of the assignments that BCG did—at least prior to the growth-share matrix—didn’t inherently make for repeat business. Which meant a continuing scramble for new clients and more marketing expenses—more Perspectives to be sent out, more conferences staged. ([Location 1252](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1252)) - Tags: [[blue]] - Steve Schaubert, a long-standing Bain partner, puts it this way: “We wanted to get strategy down to the level where somebody with a wrench in his hands could do something about it.” ([Location 1340](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1340)) - Tags: [[blue]] - Effectively, Bain was taking the concepts from the early stages of the strategy revolution and figuring out how to turn them into behavior, in ways that BCG, already moving on to look for the next killer construct, was not. ([Location 1344](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1344)) - Tags: [[blue]] - Bain & Company would work for only one company in an industry, or, more precisely, in a competitive set, and only if that company agreed to a continuing, probably multiyear relationship. That kind of commitment and open-endedness made it possible for the firm to spend months gathering data and analyzing it. ([Location 1348](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1348)) - Tags: [[blue]] - The product of Bain’s efforts was to be not a report or a study—the firm’s consultants still drip with disdain at the mention of such things—but rather a strategy and, even more important, results—results that you could see first on the bottom line, then in the stock price. Fairly quickly, this value proposition was boiled down to a snappy formulation: “We don’t sell advice by the hour; we sell profits at a discount.” ([Location 1352](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1352)) - Tags: [[blue]] - Even that focus might be too limiting, though, the consultants gradually concluded. In an era when the boundaries between industries were becoming increasingly porous, why constrain yourself to looking for lessons and insights just in the client’s industry? Might not a retailing company, say, have come up with processes—in distribution, perhaps, or customer service—that a client in manufacturing could emulate to its advantage? The aspiration now became to find the best feasible practices. ([Location 1414](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1414)) - Tags: [[blue]] - Bain was getting so much continuing business from existing clients that its paid-for consultant utilization was more like 90 percent. ([Location 1419](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1419)) - Tags: [[blue]] - each partner was required to publicly chart the stock price performance for his or her clients plotted against that of other companies in the industry and the stock market as a whole. ([Location 1423](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1423)) - Tags: [[blue]] - The solution they finally hit upon to satisfy their yen was the creation of Bain Capital, a private equity firm, in 1983. Bain Capital would be separate from the consulting firm. It would raise money from investors, including from Bain & Company partners but not limited to them, and buy businesses, which would then be given the complete Bain performance-improvement treatment, including the practice of adding performance-enhancing debt to the capital structure. After the magic had been worked, the businesses would be taken public or sold to another buyer, ideally at a multiple several times what Bain Capital had originally paid for them. ([Location 1439](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1439)) - Tags: [[blue]] - “The Evolution of Strategic Management” was fostered by recognition on Gluck’s part that planning constituted only one source of strategy. Equally important, he argued, indeed maybe more so, were strategic thinking (“creative, entrepreneurial insights”) and opportunistic decision making (an “effective response to unexpected opportunities and problems”), with all three sources rooted in “market understanding, competitive analysis,” and a grasp of “major environmental trends.” ([Location 1640](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1640)) - Tags: [[blue]] - Gluck attributed BCG’s success to its assembly of a cadre of what he called strategy buffs. ([Location 1703](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1703)) - Tags: [[blue]] - Whereas McKinsey had emphasized “the situational nature of strategy development”—as in, “It all depends”—its competitors had developed a systematic approach to the subject and had even gone beyond this to actually demonstrate “a capability to execute it.” ([Location 1704](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1704)) - Tags: [[blue]] - To counter the interlopers, Gluck outlined a program with several thrusts. They included, first, “strengthening and expanding our arsenal of concepts, techniques, tools, knowledge, practitioners, and spokesmen primarily through intensive internal development programs.” ([Location 1715](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1715)) - Tags: [[blue]] - As part of building the “knowledge culture,” its consultants began grinding out staff papers—often twenty pages long, based on experience with clients and internal debates, and some suitable for repurposing as Harvard Business Review articles. ([Location 1720](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1720)) - Tags: [[blue]] - Nowadays in a given year, some 85 percent of the firm’s revenues come from repeat business with existing customers. ([Location 1730](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1730)) - Tags: [[blue]] - the Firm would be circulating one-page bulletins summing up what had been learned on each engagement. ([Location 1744](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1744)) - Tags: [[blue]] - Andrews’s place in this history derives principally from his 1971 summa theologica. Read today—though few do—The Concept of Corporate Strategy stands out mostly as a map of the road, a very high road, not taken by subsequent thinkers on the strategy, including the posse who would later make Harvard Business School the leading source of academic wisdom on the subject. ([Location 1789](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1789)) - Tags: [[blue]] - For Andrews, “corporate strategy is the pattern of major objectives, purposes, or goals and essential plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be.” ([Location 1794](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1794)) - Tags: [[blue]] - Andrews also was clear on the proposition that a company’s strategy was, within certain constraints, the product of choices made by its leaders—still a surprisingly novel idea in academic circles of that era. ([Location 1796](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1796)) - Tags: [[blue]] - Andrews found that contrary to what contemporary economists would have predicted, different companies in that industry actually had different cost structures and different levels of profitability, mostly because competitors pursued different product and sales strategies. ([Location 1799](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1799)) - Tags: [[blue]] - Andrews took pains to describe his conception of strategy as reflecting a general manager’s point of view—in contrast to the economist’s view, which he had little use for. Economists, he argued, failed to take into account the rich variety of issues that such a manager should consider in charting the company’s future, including relating strategy to the needs of society, the environment, and the manager’s personal values, and parsing how “organizational processes and behavior” conduced to “the accomplishment of purpose.” ([Location 1802](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1802)) - Tags: [[blue]] - It was precisely this multidimensionality that Andrews ultimately believed had been abandoned by those who succeeded him in thinking about the subject, including at HBS. “Economists have been harassing my idea of the concept of competitive strategy ever since,” Andrews told me, “in the sense that the human, and the moral, and the ethical dimensions are largely ignored. Michael Porter and that group are working within the concept, but have departed from it—the ethical and moral elements—from sheer lack of interest.” ([Location 1807](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1807)) - Tags: [[blue]] - Industrial organization (IO) economics is a world of models that depict the effect of forces, at the highest level all purposed at explaining why competition exists in certain industries but not in others, and hence why some industries are more profitable. ([Location 1851](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1851)) - Tags: [[blue]] - He would take the conceptual apparatus of IO, which was about why certain industries were highly competitive and others not at all, and—to use the expression employed by almost everyone who knows this story—“turn it on its head,” focusing instead on what structural factors created opportunities in an industry that a company could exploit to its competitive advantage. ([Location 1869](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1869)) - Tags: [[blue]] - “That was the radical that I was,” Porter says. “To this day, I completely accept the premise that every company is different, that every company is unique.” But he also thought “there was a framework or structure for thinking about competition from which we can generalize. The radical in me said, ‘Look, we can believe in the core ideas of Chris and Ken, but that doesn’t mean you can’t strive for analytical frameworks that will add horsepower and insight to that quest for this unique strategy.’ That’s what we [meaning ‘I’] set out to do.” ([Location 1873](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1873)) - Tags: [[blue]] - At that stage in IO’s history, he says, the view of industry structure was “overwhelmingly dominated by just two factors: seller concentration [what percentage of the market did the top four or top eight command] and barriers to entry,” of which three or four types were posited, such as scale. ([Location 1878](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1878)) - Tags: [[blue]] - “the essence of formulating competitive strategy is relating a company to its environment,” and that the “key aspect” of that environment was the industry it found itself in and that industry’s structure. ([Location 1887](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1887)) - Tags: [[blue]] - The framework posited five factors essential to determining how profitable an industry could be for its players and where and how within it a company might have room to compete. At the center of a diagram of the forces was the competitive rivalry between “firms” (the economists’ term for “companies”) (figure 7-1). Arrayed around this rivalry and helping determine its intensity were the other forces: the bargaining power of suppliers, the bargaining power of buyers, the threat of new entrants, and the threat of substitute offerings. ([Location 1888](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1888)) - Tags: [[blue]] - “The five forces is a system that’s in motion at all times, and industry, technology, and consumer forces and all these outside forces are always acting on the five. At any point in time, you can use the framework to explain the current profitability of the industry. ([Location 1896](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1896)) - Tags: [[blue]] - Porter admits that he even lectured a bit at the end of some sessions, coming out from behind the Socratic mask. His students ate it up, new-style intellectualization breaking through the primordial, each-case-is-different mist: instead of walking away from class discussion wondering what they were supposed to have learned, they came away with charts, templates, lists that they could apply to the next strategic problem thrown at them. “Tons of takeaways,” as Porter describes them. ([Location 1947](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1947)) - Tags: [[blue]] - There were essentially three strategies a company could choose, he posited: low-cost leadership (beloved of fans of the experience curve), product differentiation (making your offering so distinctive that you could charge more for it), or market specialization (pick a niche and dominate it). ([Location 1978](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1978)) - Tags: [[blue]] - The theme that strategy is about choice, that a company must pick a strategy that distinguishes it from its competitors, was to become a constant in Porter’s work over the decades that followed. ([Location 1987](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=1987)) - Tags: [[blue]] - Businesspeople don’t spend a lot of time thinking about such questions but a review of the management literature of the second half of the twentieth century suggests that at least three possibilities contended for their attention. The first chronologically dates from Peter Drucker’s 1946 book Concept of the Corporation, whose title suggests he thought the world needed one. ([Location 2071](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2071)) - Tags: [[blue]] - the early champions of corporate strategy didn’t write much about sociology or community. Implicit in their thinking was a concept of the company more like that of economists, but less passive, more the master of its own destiny than the pawn of market forces. If the economists posited a sort of corporate version of their famous fiction, homo economicus, the consultants endowed it with certain qualities of an army—always in a fight (competition), led from the top, its sense of itself built around its strategy. ([Location 2084](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2084)) - Tags: [[blue]] - the consultants could be as oblivious as the most theory-ridden economist when it came to gauging the role of people in making a company work. ([Location 2088](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2088)) - Tags: [[blue]] - Probably his most memorable finding was that those organizations didn’t abide by theories of rational decision making. Instead of choosing the path that economists would say leads to the best possible result, they will often pick an option that keeps contending internal factions at peace, “satisficing,” to use the word Simon coined, rather than optimizing. ([Location 2094](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2094)) - Tags: [[blue]] - Peters found that much of the wisdom McKinsey had on his subject, whether homegrown or borrowed, didn’t go very far, particularly when measured against the Simonian thinking on organizations he’d been steeped in at Stanford. The Firm had built much of its reputation translating into client practice Chandler’s observation that structure follows strategy. Over time, somewhat weirdly but also perhaps inevitably, this morphed into an impression in certain McKinsey minds that in effect, a company’s strategy was its structure. ([Location 2124](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2124)) - Tags: [[blue]] - The complete list comprises a bias for action; closeness to the customer; autonomy and entrepreneurship; productivity through people; a hands-on, value-driven emphasis; stick-to-the-knitting persistence; simple form, lean staff; and simultaneous loose-tight properties. ([Location 2146](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2146)) - Tags: [[blue]] - They captured this theory in a framework they labeled the seven S’s, which were pictured as a sort of molecule linking the factors that made for corporate excellence. Each factor conveniently began with an s, as in skills, staff, style, systems, structure, shared values, and, oh yes, no bigger or smaller than any of the others, strategy ([Location 2150](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2150)) - Tags: [[blue]] - The issues raised by Peters and Waterman didn’t fit easily into the calculations of strategy consultants. How do you quantify the costs and benefits of sticking to one’s knitting, or staying close to the customer? Where does that fit on a matrix? ([Location 2154](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2154)) - Tags: [[blue]] - The new aim, he argued in a prescient memo to the firm’s leadership, should be to help clients “realistically enrich capabilities.” (“Capabilities” were to become the hot thing ten years later.) ([Location 2163](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2163)) - Tags: [[blue]] - To correct that deficiency and bring the organization practice in line with the rest of McKinsey’s new push for a “knowledge culture,” Waterman recommended studies that, like those done by the strategists, might be broken down into three phases—diagnostic, problem-solving (“crack the case”), and implementation. ([Location 2167](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2167)) - Tags: [[blue]] - For the history of strategy, what stands out in hindsight initially is the powerful critique of purely rational strategy making—as its proponents thought of it—that Peters and Waterman’s work aimed at being. The first paragraph of the first chapter of In Search of Excellence launches the attack: “An organization chart is not a company, nor a new strategy an automatic answer to corporate grief. We all know this; but like as not, when trouble lurks, we call for a new strategy and probably reorganize.” ([Location 2192](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2192)) - Tags: [[blue]] - the crucial problems in strategy were most often those of execution and continuous adaptation: getting it done, staying flexible.” ([Location 2196](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2196)) - Tags: [[blue]] - In their subsequent books, Peters and Waterman would each return again and again to the centrality of people to a company’s success—employees as the source of innovation, well-executed service, and continued corporate learning, customers as people whose wishes must be understood, honored, and if possible exceeded. ([Location 2205](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2205)) - Tags: [[blue]] - Pascale began his article on what he termed “the Honda effect” by noting that “strategy,” while seemingly “an innocent noun,” had come, for “a vast and influential population of executives, planners, academics, and consultants,” to embody “an implicit model of how organizations should be guided.” For these folks, the basis of what he described as “a $500-million-a-year ‘strategy’ industry” in the United States and Europe, the characteristic elements of strategy formulation were that it was “generally assumed to be driven by senior management whom we expect to set the strategic direction,” that it had been “extensively influenced by empirical models and concepts,” and that it was “often associated with a laborious strategic planning process that, in some companies, has produced more paper than insight.” ([Location 2225](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2225)) - Tags: [[blue]] - The Japanese viewed this emphasis on strategy as strange, Pascale argued, much “as we might regard their enthusiasm for Kabuki or sumo wrestling.” In their superior wisdom, they saw such a single-minded focus as limiting the “peripheral vision” they deemed critical to spotting changes in customers, technology, or the competitive landscape. ([Location 2231](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2231)) - Tags: [[blue]] - Note: Focus narrows vision, lack of focus allows broader pattern recognition - “The fundamental contribution of BCG is not the experience curve per se, but the ever-present assumption that differences in cost (or efficiency) are the fundamental components of strategy.” ([Location 2252](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2252)) - Tags: [[blue]] - Then Pascale sprung his intellectual trap. His stroke of genius—or at least of great cleverness and cunning—was to go to Japan and interview the six Japanese executives who had actually been in charge of Honda’s entry into the U.S. motorcycle market. ([Location 2254](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2254)) - Tags: [[blue]] - But the innovation that was to prove central, however inadvertently, to the company’s entry in the United States came from an entirely different market segment. ([Location 2262](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2262)) - Tags: [[blue]] - “He didn’t probe the target quantitatively. We did not discuss profits or deadlines for breakeven.” In fact, Kawishima said, “we had no strategy other than the idea of seeing if we could sell something in the United States.” ([Location 2278](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2278)) - Tags: [[blue]] - Pascale then went on to complete his tale of, in his words, “miscalculation, serendipity, and organizational learning.” ([Location 2296](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2296)) - Tags: [[blue]] - Note: Discarding old mental models for more useful mental models that better map to reality - The “Honda effect” was only the first of three takes his article offered on strategy, accounting for less than half of a twenty-five-page article. The last of these argued that since strategy and the “analytic and microeconomic tools” to make it were no longer adequate to the competitive task at hand, a broader framework should be employed, one that included at least six perspectives. Strategy was merely one of the six. The others consisted of our old friends from the seven-S framework—organizational structure, systems, style, staff, and shared values. ([Location 2300](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2300)) - Tags: [[blue]] - the ‘design’ ” (as in, you can choose your position and design your strategy) “and the ‘emergent’ ” (as in, it emerges from what you learn when you try to do something in the world) “schools of strategy.” ([Location 2309](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2309)) - Tags: [[blue]] - much of what goes on in business organizations comes down to a struggle between those who see the enterprise largely through the lens of the numbers—sales figures, costs, budgets—and those who focus instead primarily on people, their energies, ambitions, and limitations. A gross oversimplification, of course, but one that approximates the argument between the two schools of strategy. ([Location 2338](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2338)) - Tags: [[blue]] - This book has attempted to make the case for strategy as the paradigm by which people in business have come to organize their understanding of what a company wants to do. We’ve seen how successive thinkers built on an original construct that integrated calculations of cost, competition, and customers. ([Location 2348](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2348)) - Tags: [[blue]] - What we would be looking for in an alternative to the strategy model—a unified theory of management, if you will—would be a construct addressing each of the issues a company faces in dealing with people: how they were to be selected, trained, disciplined, compensated, motivated, managed, and led (if you admit a distinction between the last two). ([Location 2353](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2353)) - Tags: [[blue]] - Khurana points out that two areas in particular developed rapidly to the extent of even “affecting managerial practice.” The first was strategy, as developed by Porter; the second was finance, which coalesced around our old friend—and a paradigm for sure—the efficient-market hypothesis. ([Location 2394](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2394)) - Tags: [[blue]] - As Khurana notes, the disarray in organizational science—he himself is a professor of organizational behavior at HBS—merely made it easier for strategy and finance to gain primacy. ([Location 2397](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2397)) - Tags: [[blue]] - Foster in particular bangs away at the point: “McKinsey’s long-term studies of corporate birth, survival, and death in America clearly show that the corporate equivalent of El Dorado, the golden company that continually performs better than the markets, has never existed. It is a myth. Managing for survival, even among the best and most revered corporations, does not guarantee strong long-term performance for shareholders. In fact, just the opposite is true. In the long run, markets always win.” ([Location 2457](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2457)) - Tags: [[blue]] - In 2005, in their best-seller Blue Ocean Strategy, INSEAD professors W. Chan Kim and Renée Mauborgne argued that companies were better served trying to invent new markets (“the blue ocean”) rather than fighting it out on seas already beset and bleeding with established competitors (“the red ocean”). ([Location 2468](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2468)) - Tags: [[blue]] - “I desperately believe that virtually all the behavior of an enterprise is a pretty much direct inheritance of its gene pool. Whatever it was, it will stay. Microsoft is a centralized, personality-driven company, and that’s what it will always be. Many of the companies we looked at—Hewlett-Packard, 3M—were decentralized from the start”—all the better for “loose-tight properties” and “autonomy and entrepreneurship.” ([Location 2485](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2485)) - Tags: [[blue]] - Only after it had been published did I have the wit to ask him how many large companies had actually succeeded in fundamentally changing their cultures. He could think of only two—Ford Motor Company and Shell, as I recall—and the process had taken years. ([Location 2490](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2490)) - Tags: [[blue]] - he was even clearer on the chief impediment to innovation or adaptation: what he called “cultural lock-in.” Such lock-in, embodied in a company’s “rules of thumb for decision making, its control processes, and the information it used for decision making,” kept it from recognizing changes in its environment, left it unable to “shed operations with a less-exciting future,” and ultimately signaled “the corporation’s inexorable decline into inferior performance.” ([Location 2493](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2493)) - Tags: [[blue]] - After a little more back-and-forth, the final estimate would emerge: fewer than 10 percent of their clients, in the consultants’ judgment, were fully successful at putting their corporate strategies to work. ([Location 2527](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2527)) - Tags: [[blue]] - What bothered the firm more was the following passage, about the then-dominant practice in the business: “It was, according to the industry joke, the seagull model of consulting. You flew out from Boston, made a couple of circles around the client’s head, dropped a strategy on him, and flew back.” ([Location 2529](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2529)) - Tags: [[blue]] - The combination of deregulation and the invasion of one U.S. market after another by the Japanese and Europeans opened ever-wider reaches of the economy to the forces of competition. ([Location 2548](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2548)) - Tags: [[blue]] - these forces, together with antitrust actions by the government, had served to increase the portion of the U.S. economy “subject to effective competition from 56 percent in 1958 to 77 percent by 1980.” These numbers say volumes about why strategy had come to be in demand. ([Location 2550](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2550)) - Tags: [[blue]] - The consulting community in Boston whispered that Bain & Company had discovered the right model—multiyear, all-enveloping engagements with only one company per industry—even as BCG clung to its traditional drill of smaller, if exquisitely brilliant projects, sometimes of a seagullish nature. ([Location 2553](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2553)) - Tags: [[blue]] - In one sense, Henderson’s ouster can be understood as a culmination of the management ethos he had put in place; in another sense, as the failure of that ethos to keep up with new challenges confronting his firm. Besides its other manifestations, the founder’s belief in competition had translated into what some participants still call a “brutally free market” within BCG for allocating and accounting for the work done by its professionals. ([Location 2566](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2566)) - Tags: [[blue]] - Oversimplifying the matter, Henderson’s senior colleagues believed that the firm he had founded seventeen years before had to change and that he was neither capable of nor disposed to charting a new course. ([Location 2579](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2579)) - Tags: [[blue]] - The new motto subtly suggests an element of spin-your-wheels intellection that BCG may have been trying to put behind itself, along with Bruce Henderson: “Make It Happen.” ([Location 2581](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2581)) - Tags: [[blue]] - When it came to making strategy happen, as in implementing it, the obstacles for BCG began with its officers’ attitude: they weren’t merely uninterested in the effort, they were almost disdainful toward it. ([Location 2583](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2583)) - Tags: [[blue]] - “Given a choice between a project for a new client in a new industry or grinding away to make sure something actually happened at a client, we would all run off to the new client, it was just so interesting and exciting.” ([Location 2604](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2604)) - Tags: [[blue]] - “I observed Bain having phenomenal success,” he says, with its promise that a legion of Bainies would be there to help the client for as long as it took to turn strategy into results. ([Location 2606](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2606)) - Tags: [[blue]] - “Why don’t we adopt a very different model here?” Hall suggested. “Why don’t you the client take complete responsibility for that piece of work, and we the consultants will support you, facilitate you in the framing of the analysis, in doing the analysis, in coming up with the conclusions and the implementation plan and processes.” But how was that to work, practically? “Why don’t you allocate somebody from your organization who you can see five or ten years from now being CEO or a CEO candidate,” and put that person in charge? he proposed to Stigson. “Why don’t you create the team drawn from the different businesses, a mixture of analysts and project leaders, and BCG will support them in doing the sort of work we ourselves would do in a more traditional consulting relationship?” ([Location 2620](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2620)) - Tags: [[blue]] - “I argued that by doing that, you [the client] will gain from intellectual learning, your managerial and analytical capability will increase. You’re going to have far more ownership of the thinking that’s been done leading to the recommendation. And you’ll have people in place who will have the organizational credibility to lead the implementation process.” ([Location 2627](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2627)) - Tags: [[blue]] - The Bain model was much more ‘We will deliver this amount of profit improvement to you.’ I said, ‘We’re not going to deliver anything to you. You guys are going to deliver these benefits.’” ([Location 2635](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2635)) - Tags: [[blue]] - Hall saw in the sector’s complicated, process- and committee-driven decision making a good fit with his emerging, more collaborative consulting approach. He also noted that financial-services companies, with the progress of deregulation, were beginning to be freed to compete in new ways and new markets. ([Location 2654](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2654)) - Tags: [[blue]] - In its ideal form, Hall’s new model of consulting would take an iterative, semi-Socratic dynamic all the way through the project to what might seem its conclusion. There, he put in place another radical innovation, one totally consistent with his philosophy: when the results of the study jointly performed by BCG and the client team were finally presented to senior management or the board, Hall insisted that the presentation be conducted entirely by the client’s people (even if the consultants might have written much of it). ([Location 2671](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2671)) - Tags: [[blue]] - Over the next twenty years, as they wrestled with implementation, more consulting firms would adopt some version of working with teams from the client. But the question “Who will make the final presentation?” remains a wonderful test of how seriously they take the idea. ([Location 2675](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2675)) - Tags: [[blue]] - what Hall’s modus operandi clearly did for BCG was to provide a handhold into a future where client relationships wouldn’t be merely project to project, but instead could endure for years. ([Location 2691](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2691)) - Tags: [[blue]] - The experience curve in particular needed reexamination. To their surprise, consultants were also discovering that there appeared to be industries for which low cost was no guarantee of competitive advantage. Enter the possibilities for differentiation. ([Location 2698](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2698)) - Tags: [[blue]] - As a BCG consultant who started at the firm in 1979 observed, “When I joined, virtually all our focus was on the cost side.” ([Location 2704](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2704)) - Tags: [[blue]] - The essence of their case was that while accountants and their systems may have provided information useful to those trying to manage the growing industrial giants of the 1920s and 1930s, by the postwar period, their thinking was lagging behind changing realities. The profession’s focus had turned almost entirely to analysis for the purposes of financial reporting—making sure their clients’ income statements and balance sheets conformed to auditing standards. This meant a neglect of cost accounting—except in the academy, where advances were, well, academic—and a failure to keep up with the information that managers truly needed to make decisions, including decisions on strategy. ([Location 2713](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2713)) - Tags: [[blue]] - “In the 1970s, the strategy consulting firms were the cost-accounting firms. They succeeded by bypassing the standard costing systems, or lack of costing systems. There’s no question that was the origin of activity-based costing”—determining the cost of a product by adding up the costs of each of the activities that actually went in to making it. ([Location 2720](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2720)) - Tags: [[blue]] - He dates the first wrinkle on the experience curve to the late 1960s, when in a project for a large petrochemical company the consultants found that the most direct casual factor behind cost reductions wasn’t accumulating experience per se, but rather an increase in the minimum efficient plant scale as the overall market expanded. A competitor that could afford to build one of the… ([Location 2726](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2726)) - Tags: [[blue]] - In the early 1970s, working with clients in the paper and textile industries, the consultants stumbled on an anomaly even more upsetting to the BCG experience-curve orthodoxy: in those domains, there didn’t appear to be any correlation… ([Location 2729](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2729)) - Tags: [[blue]] - in certain industries, no economies were to be gained beyond a certain minimum efficient scale, which could be embodied in, say, a single machine. These were likely to be huge machines, mind you—a papermaking machine whose capacity by itself could account for 1 percent to 2 percent of the market demand—but if you could afford one, you’d be completely cost-competitive with the industry giants.… ([Location 2732](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2732)) - Tags: [[blue]] - the “industry supply curve.” The curves, reflecting the difference between the latest entrant’s cost and those of established suppliers, were much steeper in some businesses than in others. This helped the consultants explain why in industries where scale didn’t confer much advantage—paper, aluminum—companies would sometimes build crackerjack new plants, expecting returns on their… ([Location 2736](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2736)) - Tags: [[blue]] - The glitch, it turned out, was that prices in such an industry would typically reflect what it took to keep the oldest, highest-cost plants in business running—prices high enough to persuade the plants’ owners to keep operating the facilities. The industry’s overall profitability would depend on how considerable the cost difference between these marginal plants and those of the lowest-cost manufacturers, presumably the ones with the most current technology and scale. If a competitor added enough new low-cost capacity to drive a couple of the marginal plants out of business,… ([Location 2740](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2740)) - Tags: [[blue]] - For BCG, the even more worldview-shaking implication of all the anomalies surrounding the experience curve lay in the realization that in assessing the competitive situation of… ([Location 2745](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2745)) - Tags: [[blue]] - While in the 1960s “increased competition and the internationalization of many industries made cost efficiency and market share critical determinants of success,” the 1970s, with high inflation, low growth, and still more internationalization, found that market-share, low-cost strategies “met unexpected difficulty as segment specialists arose and multiple competitors reached economies of scale.” ([Location 2765](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2765)) - Tags: [[blue]] - The growth-share matrix, which Lochridge had helped perfect, had made a “major contribution to strategic thought,” but had become “misused and overexposed”—read “commoditized”—sometimes still useful but also potentially “misleading, or worse, a straitjacket.” ([Location 2769](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2769)) - Tags: [[blue]] - “McKinsey was always interested in helping our clients figure out ways they could raise prices. I’m not sure that BCG, with its focus on costs, had the same emphasis.” ([Location 2791](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2791)) - Tags: [[blue]] - On the one hand was the imperative to cut costs now and forever—an imperative born of the experience curve. On the other was the tantalizing prospect of somehow “creating value” for the customer, developing an offering that because of its novelty, special features, or appeal, can command a higher price than the commodity version. Some aspect of creating value lies at the heart of any strategy based on differentiation or specialization. ([Location 2793](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2793)) - Tags: [[blue]] - Part of the challenge is that value creation, whether in the form of innovation or growth, has never proven as susceptible to systematization as has cost reduction. ([Location 2799](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2799)) - Tags: [[blue]] - As one partner describes it, “Ours wasn’t a strategy practice in the eighties; it was a microeconomics practice.” He distills much of what the Firm did then and still does under the name of strategy as “largely efficiency-based things, broadly about increasing the output per dollar of cost.” In other words, Greater Taylorism. ([Location 2819](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2819)) - Tags: [[blue]] - Once you have designed your strategy, he writes, and aligned your organization around it, “the task of executing the strategy remains,” obviously. He goes on, in words that probably should be framed and hung on the wall of every corporate conference room where these matters are deliberated: “This means more than just running the business: It generally means changing the business.” ([Location 2831](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2831)) - Tags: [[blue]] - “The value chain [Porter’s second great contribution to strategy] and value system [the broader context for the chain] are frameworks for understanding how those activities have to change in a cost-based strategy or a differentiation strategy in order to implement the strategy you derived from your discussion of the market.” ([Location 2836](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2836)) - Tags: [[blue]] - As he wrote in an introduction to the 1998 edition, at the heart of the book is its conception of a company as consisting of all the “discrete activities” it performs—“processing orders, calling on customers, assembling products, and training employees”—activities more sharply defined than traditional “functions” like marketing or R&D “are what generate cost and create value for buyers; they are the basic units of competitive advantage.” ([Location 2840](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2840)) - Tags: [[blue]] - the value chain. The concept, mirabile dictu, arrays all the activities by which you create value in roughly the order that you do them ([Location 2849](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2849)) - Tags: [[blue]] - the business-system concept “captures the idea that a firm is a series of functions (e.g., R&D, manufacturing, channels), and that analyzing how each is performed relative to competitors can provide useful insights.” He also conceded that McKinsey “stresses the power of redefining the business system to gain competitive advantage, an important idea.” ([Location 2854](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2854)) - Tags: [[blue]] - “The business system concept addresses broad functions rather than activities”—McKinsey hadn’t chopped the pieces small enough, apparently—“and does not distinguish among types of activities or show how they’re related.” Really? ([Location 2862](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2862)) - Tags: [[blue]] - The value chain, with its supporting analytic apparatus, may be the last central, universal concept in the intellectual history of strategy, at least as of this writing, in the sense that it has to be taken into account in any company’s deliberations on what it should be doing. ([Location 2866](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2866)) - Tags: [[blue]] - “A firm differentiates itself from its competitors when it provides something unique that is valuable to buyers beyond simply offering a low price.” ([Location 2875](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2875)) - Tags: [[blue]] - Porter was timely, too, in raising the point that for a competitive advantage to lead to corporate performance better than the norm, it had to be sustainable. ([Location 2895](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2895)) - Tags: [[blue]] - “nine-tenths of the profitability differential between businesses that were initially above average and those that were initially below average vanished over a ten-year period.” ([Location 2899](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2899)) - Tags: [[blue]] - WHAT IS A COMPANY FOR? To what end do we create and toil in such entities? Nowadays, for most who give any thought to the matter, the answer seems boringly obvious: the purpose of a corporation is to enrich its owners, usually its shareholders. But in fact, agreement on this point has been arrived at only recently, starting in the 1980s largely as the product of newly discovered opportunities to make money. ([Location 2909](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2909)) - Tags: [[blue]] - There are two ways of thinking about the objective of strategy. One [coming from those still in search of excellence] is that this company is going to be a great place, and it’s going to produce these great products, and suppliers are going to love dealing with it, and it’s going to spin off economic value, but basically, this is going to be a great and enduring institution.” Foster immediately dismisses this as “a wistful notion”—sweet, sentimental, and completely wrongheaded. “The other approach,” he says, “is, ‘To hell with all that. I just want it to produce money for shareholders. This is capitalism, and in capitalism, the shareholder is at the top of the evolutionary tree, and we should return profits to shareholders.’” ([Location 2919](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2919)) - Tags: [[blue]] - This school of thought sees shareholder capitalism as short-sighted, smacking of greed, and in the end unrealistic in that it fails to take into account other constituencies or—the preferred term—stakeholders that a corporation’s actions necessarily touch, namely, the company’s employees, customers, suppliers, and home communities. ([Location 2932](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2932)) - Tags: [[blue]] - Why didn’t strategy focus more on shareholder wealth before the early 1980s? Foster provides the best single-sentence answer: “Because before then, there wasn’t any shareholder wealth.” He exaggerates, but not by much. As we noted earlier in the book, after a glorious bull-market run in the 1960s, the Dow Jones Industrial Average finally reached 1,000 in 1972 and then promptly collapsed, not to return to that high until 1982. ([Location 2943](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2943)) - Tags: [[blue]] - “Of the 500 largest industrial corporations in the U.S. in 1980”—the Fortune 500, in other words—“at least 143 or 28 percent had been acquired by 1989.” ([Location 2973](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2973)) - Tags: [[blue]] - Their participation reflected a broader trend, what some have called the institutionalization of the stock market. Increasingly, the owners of stocks would be not individuals but institutions—insurance companies, banks, pension funds, and a relatively new phenomenon, mutual funds—so much so that by 2003, institutional investors would own almost 60 percent of outstanding equities. ([Location 2992](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=2992)) - Tags: [[blue]] - Starting from the premise that the purpose of a company was to maximize value for its shareholders, they argued that managers, particularly those without large ownership stakes in the corporation, often had motives and interests different from those of shareholders. ([Location 3018](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3018)) - Tags: [[blue]] - In 1990, the Roundtable, admittedly still a bit behind the sharpies on Wall Street, intoned that “corporations are chartered to serve both the shareholders and society as a whole” and then proceeded to list the other stakeholders whose interests needed to be considered. By 1997, the tune had changed: “In the Business Roundtable’s view, the paramount duty of management and of boards of directors is to the corporation’s stockholders,” in the same statement detailing the weakness of the stakeholder model, principally the “absence of an overall objective function”—something nice and concrete like, say, the company’s stock price—with which to weigh trade-offs between stakeholders. ([Location 3052](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3052)) - Tags: [[blue]] - The goal for corporate managers had become clear—to increase the value of the company, as reflected in its stock price—and fast. Strategy was taking on ever greater urgency. ([Location 3069](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3069)) - Tags: [[blue]] - Unlike BCG or Bain, their work was rooted not in a probe of the client’s competitive situation, but rather in a long crawl down through its finances, akin to the bankerly credit analysis some of these firms’ founders had conducted before becoming consultants, but deeper. Much of what they concluded tallied with what the strategy outfits had been preaching. ([Location 3076](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3076)) - Tags: [[blue]] - when others weren’t doing so, the new arrivals banged the drum for the proposition that management’s focus had to be on building value for shareholders, arguing that most companies were missing this point as the ever-more-active market for corporate control demonstrated. ([Location 3079](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3079)) - Tags: [[blue]] - they pushed further the argument that stock prices were largely determined by cash flows investors expected from the company, not by reported earnings. ([Location 3082](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3082)) - Tags: [[blue]] - their explication of the idea that while some of a company’s businesses served to increase its stock price, others might actually be dragging the price down, or, in the ominous phrase the consultants used, “destroying value.” ([Location 3083](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3083)) - Tags: [[blue]] - No, the consultants counseled, sell off the turkeys and you may see something of a miracle: even as your company grows smaller, as measured by its revenues, your stock price will increase. In the businesses you retain, to further boost your stock price—and the fourth of the value consultants’ innovative emphases—tie managers’ compensation explicitly to how much economic profit their operations generate and to increases in that profit. ([Location 3095](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3095)) - Tags: [[blue]] - Some traditional strategy consultants would deride the VBM approach as little more than elaborate financial benchmarking. It might show you how the economic profit earned by your businesses measured up to competitors’ profit, they said, but it didn’t tell you anything about how to improve that profit beyond the obvious suggestion that it might help to cut your costs. ([Location 3098](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3098)) - Tags: [[blue]] - There is a theory—Canadian scholar Danny Miller lays it out nicely in a 1991 book, The Icarus Paradox—that when companies truly get into the deepest trouble, it’s usually not because of their weaknesses but rather because of their strengths. Or more specifically, it’s because they tend to overdo the very energies, inclinations, and expertise that brought them success. ([Location 3125](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3125)) - Tags: [[blue]] - “Their product is brilliant. It’s the package that has been a problem. Five million Bainies saying, ‘Stand aside, asshole. Here we come.’” ([Location 3239](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3239)) - Tags: [[blue]] - “In this new environment, the essence of strategy is not the structure of a company’s position in products and markets, but the dynamics of its behaviors. The goal is to identify and develop the hard-to-imitate organizational capabilities that distinguish a company from its competitors. A capability is a set of business processes, strategically understood.” ([Location 3319](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3319)) - Tags: [[blue]] - As the 1990s were to make clear, advantage based on capabilities could be competed away just as quickly as that based on position. ([Location 3323](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3323)) - Tags: [[blue]] - return to the discussion to announce, being state-of-the-art in your processes—what he called your “operational effectiveness”—merely constituted table stakes, the minimum required to keep you in the game. Strategy, he would argue, still finally came down to choosing. ([Location 3324](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3324)) - Tags: [[blue]] - “what Peters and Waterman had done was to throw down a challenge: ‘You strategists have been assuming that competitive advantage is all about what we might call structural factors—product, market, position, scale. And you have been implicitly assuming everybody is the same in how they manage themselves. Logically, it’s quite possible the reverse is true—that position, for example, doesn’t matter,’” but how you manage yourself does. ([Location 3334](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3334)) - Tags: [[blue]] - What mattered was, ‘Do you make the right credit decisions? Do you control country risk appropriately? Do you control asset-liability exposure appropriately?’” (“Parenthetically,” Evans adds, “the bank lost a half billion dollars” by not doing the last of the three particularly well.) “These are skill issues, systems issues, control issues, but they’re not structural issues by any regular definition of the term.” ([Location 3339](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3339)) - Tags: [[blue]] - What Stalk discovered startled him: as he summarized it in the preface to his 1990 book, Competing Against Time, the factories of Deere’s Japanese affiliate had “substantially higher productivity, better quality, significantly less inventory, less space, and much faster throughput times.” Stalk also recorded Bruce Henderson’s comment on learning all this: “Until the causes of these differences can be explained much of the conceptual underpinnings of corporate strategy are suspect.” ([Location 3346](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3346)) - Tags: [[blue]] - It was what Stalk added to the basic insight that was to make time-based competition BCG’s most successful concept-cum-product of the 1980s. ([Location 3355](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3355)) - Tags: [[blue]] - They argued for essentially taking the Porterian value chain of activities and speeding up not just the portion devoted to manufacturing, but the whole caboodle, to wring the maximum benefit from what flexible manufacturing enabled you to do. ([Location 3374](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3374)) - Tags: [[blue]] - if you want to go from offering the customer a choice of one of three models to be delivered in six weeks to a pick of twenty with next-day delivery, you’re going to have to revamp not just what goes on in your factories but also every process going into and coming out of them. ([Location 3377](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3377)) - Tags: [[blue]] - The choice of time—or as translated into action, speed—as the übermetric was inspired. The general rubric encompassed more specific temporal measures particular to different activities along the value chain: how long it took you to respond to a customer inquiry, for your top management to make a decision, to produce an item in the factory, to get an idea from the lightbulb-going-off-stage to a reality being sold in the market. The time spent on each activity could be readily gauged, whereas, for instance, the cost of keeping a customer waiting could not. Then they all added up to determine just how quick a competitor you were. ([Location 3383](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3383)) - Tags: [[blue]] - the S curve, to describe how new technologies catch on. When a new whizbang is introduced, only a few people try it out, their experiments proceeding with grinding slowness. Then, with apparent suddenness, it catches on, people rush to use it, and before long, it has become so common that further gains are eked out only by winning over the few remaining laggards. ([Location 3409](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3409)) - Tags: [[blue]] - The call to arms came in Foster’s further observations: S curves almost always come in at least pairs, he argued, with the successor technology experiencing its own slow start but beginning from higher on the performance axis. The evidence also suggested that a company that was master of one technology and S curve almost never succeeded in jumping successfully to the next one. Here, the killer graphic was a chart showing that a list of the top three makers of vacuum tubes in 1955 bore no relation to the list of three leading transistor manufacturers that same year, which in turn bore no relation to the list of the top producers of semiconductors ten years later. ([Location 3419](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3419)) - Tags: [[blue]] - Foster argued that what he called technological discontinuities would arrive with increasing frequency in the years to come and that the competitive battles they fostered would usually go to whoever was riding the fresh beast, the attacker, in other words. The capacity to innovate would be the key to competitive and strategic success. ([Location 3429](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3429)) - Tags: [[blue]] - To really get at what made for competitive advantage, you had to analyze a company’s “internal strengths and weaknesses” as well. ([Location 3441](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3441)) - Tags: [[blue]] - To their credit, the founding fathers of the resource-based view did try to establish criteria for judging resources on their potential for contributing to strategic advantage. 1 They settled on four criteria, whose first letters gave birth to still another acronym, VRIN. A resource must be valuable, in the sense of adding value by enabling the company to better exploit opportunities or reduce threats. It must be rare—if it’s available to anyone in the industry, it won’t confer much advantage. It must be inimitable; if your advantage is to be sustainable, the resource can’t be something competitors can easily duplicate. Finally, the resource must be nonsubstitutable: barrels of whale oil won’t do you much good when competitors are already filling your customers’ lamps with kerosene. ([Location 3446](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3446)) - Tags: [[blue]] - The piece inveighed that most Western companies were losing out to competitors from abroad (read “Japan”)—Caterpillar to Komatsu, Xerox to Canon—in substantial measure because the Westerners were following wrongheaded, constraining notions of strategy. Indeed, the authors maintained, “as ‘strategy’ has blossomed”—referring to most of the concepts discussed so far in this book—“the competitiveness of Western companies has withered. This may be a coincidence, but we think not.” ([Location 3481](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3481)) - Tags: [[blue]] - “It’s not very comforting to think that the essence of Western strategic thought can be reduced to eight rules for excellence, seven S’s, five competitive forces, four product life-cycle stages, three generic strategies, and innumerable two-by-two matrices”—sparing only the partridge in a pear tree. Reliance on such ideas isn’t merely unimaginative; it can have “toxic side effects,” reducing “the number of strategic options management is willing to consider.” ([Location 3485](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3485)) - Tags: [[blue]] - What you want instead, learning from the Asian masters—and yes, Prahalad and Hamel invoke Sun Tzu—is an encompassing “strategic intent,” something like establishing global leadership in a particular market or industry. Just seeking to increase shareholder wealth, the piddling measure by which most American CEOs gauge their success, hardly qualifies and won’t get the troops excited. ([Location 3488](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3488)) - Tags: [[blue]] - The aim of strategy should be to “create tomorrow’s competitive advantages faster than competitors mimic the ones you possess today.” The secret to doing this lies in the corporation’s skills and its ability to acquire new ones—“learning,” in other words—which the authors describe as “the most defensible competitive advantage of all.” ([Location 3495](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3495)) - Tags: [[blue]] - Note: Meta competitor advantage - the competitive advantage conferred by being able to learn new competitive advantages - The piece maintained that smart companies, again almost all Asian, view themselves not as portfolios of businesses but rather as portfolios of competencies. Just what constitutes a core competence remains a little slithery throughout, though. “The real sources of competitive advantage,” Prahalad and Hamel argued, “are to be found in management’s ability to consolidate corporatewide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities.” Such competencies are the “collective learning in the organization”; they’re “about harmonizing streams of technology” and “the organization of work and the delivery of value.” A core competence is “communication, involvement, and a deep commitment to working across organizational boundaries.” ([Location 3502](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3502)) - Tags: [[blue]] - the “building blocks of corporate strategy are not products and markets but business processes,” and that competitive success depended on a company’s transforming its key processes into “strategic capabilities.” ([Location 3522](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3522)) - Tags: [[blue]] - The gravamen of Hammer’s argument was that companies were stuck with business processes—how they took orders, or managed payables, or made their products—that were outdated and hopelessly inefficient in a computerized age. Rather than trying to reform these relic millstones, you should just blow them up, Hammer counseled. He proposed starting with a blank sheet of paper and redesigning successor processes that incorporated the latest information technology. In so doing, you should knock down traditional bureaucratic partitions in how you arranged work, keeping always in mind the ultimate beneficiary, usually your customer. ([Location 3588](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3588)) - Tags: [[blue]] - “His [Christman’s] creation of CSC Index’s Research and Advisory Services (of which he was president) is widely acclaimed as the driving factor behind the growth of CSC Index from a $10 million I/T consulting firm to a $225 million consulting organization over a ten year period.” ([Location 3618](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3618)) - Tags: [[blue]] - The one-sentence explanation is that in the eyes of the corporate world, reengineering came to be seen as synonymous with downsizing, and underlings as resistant to its introduction. ([Location 3624](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3624)) - Tags: [[blue]] - An even louder blast at the notion that you could compete solely on the basis of capabilities was sounded three years later by Michael Porter in his Harvard Business Review article “What Is Strategy?” ([Location 3647](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3647)) - Tags: [[blue]] - Indeed, heretical tendencies had even grown to the point of arguing that in a world of ever-faster change, you didn’t need a strategy and might even be held back by one when you should be reinventing yourself. Porter’s answer was his “What Is Strategy?” article. ([Location 3663](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3663)) - Tags: [[blue]] - Porter rejected what he called the “new dogma” that in a world of more dynamic markets and changing technologies, “rivals can quickly copy any market position, and competitive advantage is, at best, temporary.” People who fell for this canard did so, he maintained, because they failed to distinguish between “operational effectiveness” and “strategy.” ([Location 3665](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3665)) - Tags: [[blue]] - he consigned to operational effectiveness a jumble of management tools that had, he claimed, “taken the place of strategy,” including “total quality management, benchmarking, time-based competition, outsourcing, partnering, reengineering [and] change management.” ([Location 3668](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3668)) - Tags: [[blue]] - The point of operational effectiveness is to outdo your rivals on all the activities that result in greater value for customers, which enables you to deliver a superior product for which you can charge more or to offer them what they can get elsewhere but at a cheaper price. Operational effectiveness thus boiled down, for Porter, to pretty much performing the same activities as your competitors, but more efficiently than they do. In contrast—drumroll here—“Strategic positioning means performing different activities from rivals’ or performing similar activities in different ways.” ([Location 3670](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3670)) - Tags: [[blue]] - Two fatal flaws attached to competing on operational effectiveness, Porter argued. First, competitors quickly copy one another’s techniques and technologies, pushing what he called the industry’s “productivity frontier” ever outward, “raising the bar for everyone.” ([Location 3678](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3678)) - Tags: [[blue]] - Second, because everyone is benchmarking one another and often outsourcing activities to the same superefficient suppliers, the strategies of competitors converge and become “a series of races down identical paths that no one can win.” ([Location 3681](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3681)) - Tags: [[blue]] - The answer, of course, and the essence of strategy, is to be different. ([Location 3683](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3683)) - Tags: [[blue]] - You can go for “variety-based positioning”: rather than focus on a particular customer segment, you concentrate on a particular product or service as, for instance, the Vanguard Group did on index mutual funds. Or “needs-based positioning”: zero in on the needs of a particular group, as Bessemer Trust’s private-banking operation does on families with a minimum of five million dollars in investible assets. Or “access-based positioning”: even though your customers’ needs may not be that distinctive, the ways of reaching them are. Carmike Cinemas, for example, only operates movie theaters in cities and towns of less than 200,000 people. ([Location 3685](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3685)) - Tags: [[blue]] - Your goal here is to align all your activities in such a way as to achieve Porter’s other desideratum, which goes by the not-exactly-lyrical name of “fit.” ([Location 3691](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3691)) - Tags: [[blue]] - A company that achieves his “third-level fit,” its activities reinforcing one another, the overall effort optimized, can expect to enjoy a strategic position that has a “horizon” of a decade or more; ([Location 3698](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3698)) - Tags: [[blue]] - In the face of Porter’s ever-more-vociferous “You have to choose,” they’re still stuck with the classic question from the strategy-as-learning school, “But how much choice do most companies really have with respect to their position?” ([Location 3708](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3708)) - Tags: [[blue]] - Even before Porter’s pronouncements or the collapse of reengineering, companies struggled to get much practical value from their understanding of core competencies and capabilities. Strategy consultants repeatedly observed that clients had difficulty defining their competencies precisely, ([Location 3721](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3721)) - Tags: [[blue]] - Out of the confusion, a tendency emerged to claim a long list of competencies along with an unwillingness to concentrate on just a few, as the consultants and original authors on the subject all advised. ([Location 3724](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3724)) - Tags: [[blue]] - Where partisans of the strategy revolution should find excitement in this era is in the spread of the paradigm around the globe, to wherever there were companies of sufficient size and sophistication to enlist the help of a McKinsey or Boston Consulting Group. ([Location 3744](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3744)) - Tags: [[blue]] - Pound for pound, the best market in the world for high-level consulting today is Germany—McKinsey and BCG each have seven offices there—as it has been for two or three decades. As of this writing, McKinsey, with 94 locations in 52 countries, is headed by the Canadian-born Dominic Barton; BCG, 66 offices in 38 countries, by a German, Hans-Paul Bürkner. ([Location 3748](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3748)) - Tags: [[blue]] - strategy itself was seeping into every corner of the world economy. ([Location 3752](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3752)) - Tags: [[blue]] - And in the ever-growing proportion of executives who have MBA degrees, including the swelling ranks of CEOs with not just an MBA but experience at a strategy consulting firm as well. ([Location 3755](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3755)) - Tags: [[blue]] - The first two were laced with globalism: accelerating “the development of our global consultants and [increasing] the effectiveness of our global networks” and continuing to “grow in countries where we are already well established” while at the same time expanding “our global network.” ([Location 3760](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3760)) - Tags: [[blue]] - In keeping with his belief that a company’s original gene pool largely ordains its corporate destiny, Tom Peters observes that the essential strand of the Firm’s genetic endowment reads “Advisor to CEOs.” ([Location 3769](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3769)) - Tags: [[blue]] - The Firm’s ability to insinuate itself into local elites drives its competitors slightly berserk with envy. ([Location 3776](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3776)) - Tags: [[blue]] - As a young associate, he had two goals: working only on the client’s biggest problems and dealing with client executives as an equal, not as a flunky adviser. ([Location 3786](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3786)) - Tags: [[blue]] - strategy was an ideal product for a consultant aiming to work at the highest corporate levels, not just in Germany—Henzler credits McKinsey’s nine-box matrix with getting the Firm in the door at Siemens in 1974—but also around the world. ([Location 3797](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3797)) - Tags: [[blue]] - In the language of the trade, McKinsey had taken share largely by growing the market. After merely doubling its revenues between 1975 and 1980, it nearly tripled them in the five years thereafter. ([Location 3806](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3806)) - Tags: [[blue]] - What was clear was where the Firm was placing its bets geographically: between 1979 and 1988, when Gluck succeeded Ron Daniel as managing director, it opened twelve new offices. Three were in the United States, nine in Europe, and one in Hong Kong. ([Location 3809](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3809)) - Tags: [[blue]] - Partly in response to this concern, as an element in his campaign to make McKinsey’s culture a “knowledge-based” one, Gluck had from the early 1980s been plumping for the creation of centers of competence, working groups that would build the Firm’s expertise on rather grandly defined topics such as change management, integrated logistics, and corporate leadership. ([Location 3821](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3821)) - Tags: [[blue]] - While some of the change may be attributed to Gluck’s calls “to let 1,000 flowers bloom”—Mao trumping Sun Tzu—more derived from the Firm’s realization that if it were to keep doubling or tripling in size, it would have to follow the trajectory of its clients’ needs for ever-more-specialized and technical knowledge. Industry practices were rooted in an easily identifiable and repeatable set of clients. ([Location 3827](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3827)) - Tags: [[blue]] - None of the three resemble what a security analyst might call a pure-play strategy consultant. That beast no longer exists, or if it does, it is the size of an insect and can escape our notice. ([Location 3834](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3834)) - Tags: [[blue]] - “By the early 1990s, too many people were seeing practice development as the creation of experts and the generation of documents in order to build our reputation. But knowledge is only valuable when it is between the ears of consultants and applied to clients’ problems. [W]e shifted our focus from developing knowledge to building individual and team capability.” ([Location 3840](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3840)) - Tags: [[blue]] - the Firm had to more deliberately ensure that its insights were actually making a difference for clients. ([Location 3843](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3843)) - Tags: [[blue]] - the most important of its successful recommendations was for a change in what Bartlett calls the firm’s “key consulting unit,” away from the “engagement team” toward the client service team. Instead of focusing on discrete projects of three or four months—“engagements,” in McKinsey-speak—teams would be formed with a core group, usually partners, drawn from different engagement teams and tying these teams together to serve a particular client for longer periods, preferably forever. ([Location 3845](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3845)) - Tags: [[blue]] - The days of the one-off engagement were largely over, taking with them, perhaps, some of the avidity for short, sharp, empirically based insights that might unsettle the client. ([Location 3859](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3859)) - Tags: [[blue]] - The collapse of the technology boom and the stock market at century’s end would land many of the Firm’s clients in trouble—most famously Enron, headed by former McKinsey partner Jeffrey Skilling and a consistent generator of around $10 million a year in billings, but also Global Crossing, Kmart, and Swissair, all of which declared bankruptcy. ([Location 3875](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3875)) - Tags: [[blue]] - “They’re just not as interested in developing ideas anymore” goes the refrain from a half dozen former partners. Surveying the intellectual landscape around strategy at least, it’s sadly difficult to find evidence to prove them wrong. ([Location 3883](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3883)) - Tags: [[blue]] - Like other veterans of BCG’s early days, Clarkeson fervently espouses the distinction between strategy and strategic planning; he says he doesn’t think the firm ever wrote a strategic plan for a client. ([Location 3903](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3903)) - Tags: [[blue]] - Even though BCG largely gave up holding conferences in the United States by the late 1980s—too many events, including CSC Index’s, competing for too little executive time—the ([Location 3912](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3912)) - Tags: [[blue]] - While Germany virtually invented the modern research university in the nineteenth century and has a distinguished history in technology and science, it has had no business schools or systematic education in management until very recently, well after the strategy consultants arrived there. (This, coupled with the lack of investment banks to compete with for recruits, enabled the likes of BCG to bring on board some of the brightest young minds in the country who had an interest in business.) ([Location 3921](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3921)) - Tags: [[blue]] - But partly because the triumphant Allies after World War II had worked so hard to break up German conglomerates, even giant recombinants such as Siemens lacked bench strength in disciplines such as finance and marketing, which a McKinsey or BCG could supply as part of a strategy package. ([Location 3928](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3928)) - Tags: [[blue]] - “The clients said, ‘We paid not only for solutions but also for training for our best people,’ and not just planners, but lots of line executives. And line people, of course, say, ‘Yeah, it’s a fascinating idea, but tell me how to make it work, tell me how to do this.’” ([Location 3935](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3935)) - Tags: [[blue]] - “Let’s go down to the shop floor and change things there. That will be the source of our competitive advantage.” It was, he notes, the Germans teaching their consultants to look for a strategic edge in capabilities, and this long before George Stalk and others had begun to proclaim the importance of same. ([Location 3937](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3937)) - Tags: [[blue]] - “And the quantitative dimension of our work, the rational, was very much congenial to their frame of mind. BCG was the most Cartesian U.S. consulting firm.” ([Location 3974](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3974)) - Tags: [[blue]] - the French operation decided to effectively relaunch itself, focusing on large and promising companies and vowing, as Abate puts it, “that a client was a client forever.” It began tracking the length of its service to clients, with the ideal of providing billable help every single month, possibly excepting August, when everyone was out. ([Location 3980](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3980)) - Tags: [[blue]] - abandoned the traditional BCG focus on measuring its consultants according to the hours they billed. No, he told his colleagues, take time your time and get to know the client’s organization, its people, where they went to school. ([Location 3982](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=3982)) - Tags: [[blue]] - The rise of the MBA degree may not be a perfect proxy for the spread of strategy first in the United States, then around the world, but there are strong threads tying the two together. ([Location 4010](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4010)) - Tags: [[blue]] - Corporate strategy, he found, was part of the core curriculum, the courses required of all students, at 92 percent of the institutions. Only marketing, finance, accounting, and operations had higher percentages, and those disciplines had been around for six or seven decades at least, strategy for a mere three. ([Location 4017](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4017)) - Tags: [[blue]] - “By the late 1970s, the intellectual gap (as measured by standardized test scores) between students entering an elite business school and those matriculating at an elite law school or a doctoral program—a gap that had persisted more than eight decades—was rapidly closing. The typical student in the elite MBA programs in the 1970s was much more academically oriented than earlier business school students had been, owing not just to increased competition for slots in these programs, but also to qualitatively different admissions standards reflecting the new analytical orientation of the curriculum”—think Michael Porter—“and the values of research-oriented faculty.” ([Location 4041](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4041)) - Tags: [[blue]] - The up-or-out policies of the consulting firms, a reflection of their structure—the income of the seniors being dependent on the firm’s ability to bill out teams of lesser-paid juniors—dictate that no more than one out of eight or ten who start will survive the progressive weeding process and eventually make partner. While 25 percent of Harvard’s MBAs may go into consulting in any given year, only 11 percent of HBS alumni say they continue to work in the industry. ([Location 4050](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4050)) - Tags: [[blue]] - Among the reasons why large companies hire strategy consulting firms is that the companies don’t continuously need, and can’t support economically or organizationally, the concentrations of high-octane brain power that the consulting firms can assign to a project. ([Location 4057](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4057)) - Tags: [[blue]] - Indeed, it was about this time that the consulting firms began to complain that clients were becoming more demanding, often because the advice-givers now found themselves dealing with MBAs at least or, even more exacting, with former strategy consultants. ([Location 4080](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4080)) - Tags: [[blue]] - Gerstner reports that the most important thing he learned at the Firm “was the detailed process of understanding the underpinnings of a company. McKinsey was obsessive about deep analysis of the company’s marketplace, its competitive position, and its strategic direction.” ([Location 4088](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4088)) - Tags: [[blue]] - Gerstner’s example also points us to a hypothesis, not proven or even provable, about one of strategy’s effects on the sociology of corporations: namely, that the emergence of the paradigm both helped accelerate the trend toward greater mobility of CEOs between companies and, even harder to nail down, increased the distance between the top and those who worked in the ranks below them. ([Location 4111](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4111)) - Tags: [[blue]] - Khurana notes that what boards were looking for at bottom was the ability to work change, and as we’ve seen, in the modern corporate era, bringing in a new strategy was the way to beget change. ([Location 4129](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4129)) - Tags: [[blue]] - Kotter, a professor at HBS, shadowed thirteen general managers—a technical use of the term, we’d call almost all of them senior executives—who were judged by their companies to be high performers. What he found tracking their daily rounds was that they moved the world forward not by issuing orders or making speeches, but rather by a seemingly endless series of small interactions—a question here, a brief comment there—with scores or even hundreds of people they knew, networks within the company and the industry that they had built up over years. The new CEO from outside, gifted as she may be in decision-making and the interpersonal arts, what can she lean on in the absence of such a network? ([Location 4134](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4134)) - Tags: [[blue]] - laypeople were riveted with stories of traditional players driven to the wall by competition from unexpected quarters—encyclopedia publishers brought to their knees by Microsoft, the music business upended by Apple and the iPod. ([Location 4154](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4154)) - Tags: [[blue]] - you had to choose what would make you different. But where were you to look for that difference, and even if you found it, how long was it likely to last? ([Location 4156](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4156)) - Tags: [[blue]] - “Recent research by L. G. Thomas and Richard D’Aveni”—as yet unpublished but apparently an update on D’Aveni’s 1994 book Hypercompetition—“suggests that industry leadership is changing hands more frequently, and competitive advantage is eroding more rapidly, than ever before.” ([Location 4159](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4159)) - Tags: [[blue]] - “In our 2004 Growth Survey of 259 executives worldwide, 60 percent reported that their primary source of competitive advantage in their core business was eroding rapidly; 65 percent said that they would need to fundamentally restructure the commercial model they used to serve their core customers; and 72 percent believed that their primary competitor in five years would not be the company that was currently their primary competitor.” ([Location 4162](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4162)) - Tags: [[blue]] - where was a company to seek an edge enduring enough to build a strategy around? One possibility, seemingly more valuable all the time, was McKinsey’s “tradable privileged assets”—brands, patents, trademarks—that could be sold or, more importantly, bought. ([Location 4166](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4166)) - Tags: [[blue]] - “intellectual capital” constituted the “new wealth of organizations,” ([Location 4168](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4168)) - Tags: [[blue]] - intellectual capital beyond the tradable was damnably difficult to measure, anatomize, or capture, no easier than core competencies. ([Location 4170](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4170)) - Tags: [[blue]] - If your existing advantage was always evaporating, might not the only practicable course be to create a new competitive advantage—invent the product that will make the other alternatives obsolete, create a market where none existed before? ([Location 4171](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4171)) - Tags: [[blue]] - Fastening on people as the critical resource for innovation and growth is the first of three ways of conceiving of strategy as centered on people we’ll look at in this chapter. ([Location 4176](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4176)) - Tags: [[blue]] - The second version of strategy as people consists of attempts to use the concept of the network to analyze ways in which individuals relate to one another, this as a stepping-stone to competitive advantage. ([Location 4178](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4178)) - Tags: [[blue]] - The third version may seem the most surprising: private equity, and what private equity firms do with the businesses they acquire, as a kind of apotheosis of strategy. ([Location 4180](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4180)) - Tags: [[blue]] - “I absolutely agree that the intellectual and social capital represented by the people in an organization will be the key to its competitive advantage in the future,” runs a typical comment, this from a senior partner of a consulting firm. But beyond such attestation, no one can much agree as yet on what “strategy as people” actually means. ([Location 4189](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4189)) - Tags: [[blue]] - When it came to creating jobs and wealth, the action lay instead with new businesses being started up, a historically astonishing 1.5 million of them in the United States over the 1980s. ([Location 4206](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4206)) - Tags: [[blue]] - strategic orientation—entrepreneurial outfits that “are driven by the perception of opportunity, whereas administrative organizations are driven by the resources currently controlled”—and strategic experimentation, the upstarts being willing to make “revolutionary, short-duration commitments to opportunity,” while the old corporate bags plodded along with evolutionary, longer-duration bets. ([Location 4215](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4215)) - Tags: [[blue]] - Hamel offered nine “routes to industry revolution,” gambits such as “radically improving the value equation,” “compressing the supply chain,” and “driving convergence.” But the main thrust of the article and the ensuing book was that strategy-making must be made democratic. ([Location 4263](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4263)) - Tags: [[blue]] - Companies should seek out revolutionaries from among their twenty-five-year olds, from people serving on the corporate periphery far from headquarters, and from newcomers “who have not yet been co-opted by an industry’s dogmas … What senior executives must not do is ask a small, elite group or the ‘substitute brains’ of a traditional strategy-consulting firm to go away and plot the company’s future.” ([Location 4265](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4265)) - Tags: [[blue]] - Critics of The Future of Management pointed out that each of three main corporate examples—Whole Foods, W.L. Gore, and Google—had been created with self-consciously revolutionary values. How much of the route to Hamel’s democratic paradise could be learned from angels born there? ([Location 4280](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4280)) - Tags: [[blue]] - Evans is the only thinker I’ve encountered who talks about the ontology of strategy (the philosophy of being it’s premised on) and its epistemology (its theory of the nature of knowledge, in this instance, the knowledge of how to achieve competitive advantage). “Porter took a lens from structuralist economics, but he applied it to, quote unquote, an industry,” Evans argues. “What’s an industry? A small number of largely similar organizations, internally collaborative, externally competitive, that connect to each other through the mechanism of a competitive market, and connect upstream to suppliers, downstream to customers. If structural advantage was the epistemology, the ontology was that picture of who the players are,” namely, companies. “Both Bruce Henderson and Porter subscribed to that set of premises.” ([Location 4289](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4289)) - Tags: [[blue]] - But strategy evolved. “When capabilities came along,” Evans argues, “that changed the epistemology—it said, ‘No, competitive advantage is not identification of structural differences; it’s the identification of capabilities.’ But the ontology stayed exactly the same—companies competing with one another in an industry.” Perhaps not forever, though. “The deconstruction logic challenges the ontology,” argues Evans. “It says, ‘Wait a second. Who says there’s this thing called “the business,” or “the company,” or “the industry”?’” He then cites a soon-to-be former industry in which he did a lot of consulting: “What’s the media industry, anymore? Blogs? Who are the customers, who are the suppliers? If customers start talking to one another, who’s supplying whom?” ([Location 4294](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4294)) - Tags: [[blue]] - “Once you start from the idea that the unit of competitive advantage is not necessarily the corporation, as conventionally defined … it’s like in biology, going from thinking of competition among animals to thinking of competition among genes. The generation of strategic thinking we’re now entering challenges the earlier ontological assumptions. It says that the only irreducible unit in this picture is the person—the customer, worker, or executive. It says that people engage in transactions, broadly defined, that may be competitive, or may be cooperative, but what emerges is a network. As technology drives down the costs of transactions, breaking the constraints of distance or of institutions, those networks become more fluid.” ([Location 4301](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4301)) - Tags: [[blue]] - “the key way to think about competitive advantage is to think about how to design ecology in such a way to achieve goals you’re trying to pursue. To say that we’re trying to design an ecology means I’m trying to shape my behavior, the behavior of people who are co-employed with me, the behavior of people who are not co-employed with me but with whom I’m collaborating, and with people who are not employed with me and with whom I’m competing.” ([Location 4306](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4306)) - Tags: [[blue]] - few other enterprising souls within the firm also tried to parse the implications of networks for strategy making, ([Location 4311](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4311)) - Tags: [[blue]] - theories of network analysis can be applied to business. ([Location 4314](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4314)) - Tags: [[blue]] - As of his departure, Blaxill was the only BCG partner ever to have sold a network-based project to a client. ([Location 4327](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4327)) - Tags: [[blue]] - most of BCG’s efforts with network analysis consist of developing tools for use in its practice areas—one to help clients “extract, construct, and analyze networks of medical research and publication,” as the product brochure reads, or another that “visualizes and analyzes patent data as networks of relationships.” ([Location 4328](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4328)) - Tags: [[blue]] - For a near perfect if slightly specialized example of the strategy revolution in action before the global financial collapse, where the revolution had brought us, and where it is still likely to take us, we could hardly do better than to look at the operations of private equity firms. ([Location 4333](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4333)) - Tags: [[blue]] - Private equity firms raise pools of capital from investors, mostly institutions—pension funds, university endowments—but also from so-called substantial individuals. This capital, chunked into successive funds, each typically with a five- to seven-year duration, is then used to buy businesses—whole companies or “carve-outs” from larger enterprises. ([Location 4339](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4339)) - Tags: [[blue]] - The aim of the exercise is to increase the value of these portfolio businesses such that they can be taken public or sold again to another buyer, this within the life of the fund and for a high enough price to provide everyone, particularly the PE firm, a healthy return. ([Location 4342](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4342)) - Tags: [[blue]] - A Credit Suisse First Boston analysis in 2007 suggested it was within the reach of the PE industry as a whole to buy one out of every five companies in the United States and Europe with market capitalizations of under $30 billion. ([Location 4351](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4351)) - Tags: [[blue]] - Through the first twenty years of its history and still today to a lesser extent, PE was largely run by financial types, men—and they were almost all men—whose passion was for financial engineering and doing deals. But gradually, former consultants began to infiltrate their ranks. ([Location 4358](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4358)) - Tags: [[blue]] - For years, the PE offshoot would use Bain & Company as its primary source of talent, recruiting those who had proven themselves among the hottest of the hotshots. ([Location 4361](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4361)) - Tags: [[blue]] - At least until the recent crisis hit Wall Street, the estimate was that one out of three McKinsey alums worked in PE or other branches of financial services (such as hedge funds). ([Location 4364](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4364)) - Tags: [[blue]] - What consultants bring to jobs in private equity, at least to hear them tell it, is experience in improving the performance of companies—experience based on years of analyzing and advising. ([Location 4367](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4367)) - Tags: [[blue]] - In the game of generating big returns, what will increasingly distinguish the winners from the losers—and there are lots of these; by Bain & Company’s calculations in 2007, 75 percent of PE firms fail to earn more than their risk-adjusted cost of capital, a figure undoubtedly made worse by the recent disruptions—will be the ability to ratchet up the performance of their portfolio companies and, with it, their eventual sales price. ([Location 4372](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4372)) - Tags: [[blue]] - Bain’s help to its PE clients comes in two forms. Before the decision to buy a particular business, it will perform what it calls “strategic due diligence,” surveying the industry and players across the potential property’s value chain, from its suppliers to its customers. ([Location 4386](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4386)) - Tags: [[blue]] - “an investment thesis”: how we are going to make this business more valuable within three to five years, including what parts of it we will want to sell off. ([Location 4388](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4388)) - Tags: [[blue]] - Bain then works with its client to develop a performance improvement plan, particularly for the first one or two years: targets to be achieved, including financial goals, often plotted down to the month, with the steps to be taken to get there. ([Location 4390](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4390)) - Tags: [[blue]] - The PE firms use debt aggressively to leverage up the acquired assets, part of what Haas calls “working the balance sheet.” They concentrate on just a few metrics, chief among them usually cash flow, abandoning the dizzying panoply of measures the acquired business may have layered on over its history. They reduce costs relentlessly. ([Location 4394](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4394)) - Tags: [[blue]] - PE firms “maintain a willingness to swiftly sell or shut down a company if its performance falls too far behind plan or if the right opportunity knocks,” ([Location 4398](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4398)) - Tags: [[blue]] - businesses that have been taken public after being owned by a PE firm long enough to be put through a workout—at least one year—typically outperform both other IPOs and the overall stock market over the next three to five years. ([Location 4404](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4404)) - Tags: [[blue]] - At the crest of the industry’s latest wave of success in 2007, private equity’s most vociferous advocates hailed it as a new version of capitalism that would find ever-wider currency—management by the most economically rational of owners. ([Location 4414](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4414)) - Tags: [[blue]] - But don’t count the PE model out, its proponents hasten to add. It’s clearly not applicable for every stage of a business’s life, usually only for companies that have reached a certain maturity. (For startups, the comparable force is venture capitalists, another breed of ultrarational investor.) ([Location 4433](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4433)) - Tags: [[blue]] - While few voiced concern about the matter before the crash, the share of corporate profits in the United States sopped up by banks, investment banks, insurance companies, and other purveyors of financial services had swelled generously in the first years of the twenty-first century. In the early 1980s, the profits they earned accounted for a mere 15 percent of total U.S. corporate profits. In the 1990s, as good times prevailed in the economy, the sector occasionally garnered a 30 percent share of the rising profit pie. By 2007, at the pinnacle of the financial-service firms’ success, their share of U.S. corporate profits amounted to 41 percent of the whole. ([Location 4455](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4455)) - Tags: [[blue]] - The banks and other financial-service outfits were coming off a long period coping with just the kinds of external shocks—including the Four Horsemen—that impelled companies to embrace strategic thinking. ([Location 4465](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4465)) - Tags: [[blue]] - The result, cheered on by the strategy consultants and in many cases actively charted out by them, was massive consolidation of the banking industry, what Bruce Henderson might have described as building scale to gain share. ([Location 4471](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4471)) - Tags: [[blue]] - From the 1980s on, leading thinkers on strategy had ever more loudly proclaimed that innovation was increasingly the key to competitive advantage. Financial institutions appeared to take this message to heart as well. They invented new products, as Merrill Lynch did with wrap accounts (“Let us help you invest in a dizzying variety of funds, all for a small annual fee”), or expanded the use of older offerings beyond recognition, as Citibank did with credit cards. ([Location 4476](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4476)) - Tags: [[blue]] - The other form of innovation that would come into question after the global financial collapse was organizational. Marching under matching banners that read “Free markets know best” and “Down with restrictive regulation,” financial firms and their lobbyists steadily chipped away at laws restricting interstate banking or setting limits on what kinds of businesses a bank holding company might be in. Increasingly, Brobdingnagian giants such as Citigroup or Bank of America would end up offering their clients not just banking services but also mutual funds, brokerage, and insurance, all this with an eye toward plumping the institution’s “share of wallet.” ([Location 4481](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4481)) - Tags: [[blue]] - After the bursting of the dot-com balloon in 2000, housing became one of the few industries holding out the allure of big money to be made fast, and the Federal Reserve helped the party along. Wanting to spur the recovery, it lowered interest rates from the 6.5 percent that prevailed in May 2000 down to 1.75 percent in December 2001. Housing boomed: prices of existing homes rose, construction abounded, and owners borrowed against their rising asset values and spent the cash. ([Location 4492](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4492)) - Tags: [[blue]] - the deregulation of financial markets, and especially the 1999 repeal of the Glass-Steagall Act, permitted a wave of mergers whereby banks, investment banks, and insurance companies piled into each other’s traditional markets. ([Location 4496](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4496)) - Tags: [[blue]] - All of which made it easier for the great financial minds devising products to sell to investors eager for higher returns than the pitiable rates available from, say, plain old bonds in the low-interest rate milieu. How about a nice mortgage-backed security, maybe repackaged into a collateralized debt obligation? Or a credit default swap? By 2007, there had grown up a shadow banking system, mostly beyond the regulatory sunshine illuminating the traditional system, with about $60 trillion in assets—at least on paper—some four times the size of the U.S. gross domestic product. ([Location 4499](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4499)) - Tags: [[blue]] - Since the mortgages the lenders originated were to be promptly sold off and securitized, the friendly folks at your local mortgage-lending company had every incentive to make as many loans as possible and almost none to worry about whether those loans would eventually be paid back. ([Location 4505](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4505)) - Tags: [[blue]] - In September 2008, the wheels began to fall off the juggernaut: the abysmal quality of many subprime mortgages became manifest. The housing market, already in decline, tanked. Firms holding securities based on the mortgages failed (Lehman Brothers) or had to be rescued by the government. Stock markets crashed around the world. The enormity of the counterparty risk entailed in AIG’s credit-default business came to light, along with AIG’s inability to pay off on its obligations. Credit markets seized up; even worthy borrowers were unable to get loans. The economies of major nations plunged into recession, or deeper into recessions already under way. ([Location 4509](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4509)) - Tags: [[blue]] - In strategic planning sessions in 2002, their consultant advised them that if Countrywide’s market share was higher, so would be their stock price. The consultant, Eric Flamholtz, a professor at UCLA’s Anderson School of Management, told how most industries evolved such that one competitor had more than a 40 percent share, the next more than 20 percent, a third competitor 10 percent, and the rest mere boutique status. (One can almost see Bruce Henderson nodding from the great beyond.) This, at a point when Countrywide’s share was about 10 percent and the market share leader’s was no more than 13 percent. ([Location 4531](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4531)) - Tags: [[blue]] - As Bruck recounts, with abundant quotations from people present as the drama unfolded, the effect of the goal on Countrywide’s lending practices was almost immediate and ultimately pernicious. Just about any loan was to be made, provided that the price exacted from borrowers was high enough. Whatever kinds of loans competitors were offering, Countrywide would offer, too. Loan-credit standards, including those for people taking out subprime loans, declined almost to nothingness. ([Location 4537](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4537)) - Tags: [[blue]] - For students of strategy surveying the wreckage of the financial system, examples of strategic precepts leading the players astray won’t necessarily come as a surprise. (Think back to all those companies that claimed to have been ruined trying to apply the growth-share matrix to themselves.) ([Location 4552](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4552)) - Tags: [[blue]] - Many of the bank holding companies and brokerages that became too big to fail had drawn heavily on the consultants’ strategic advice as they grew over the 1980s and 1990s. But by the time of the great runup to the crash, a new generation of leaders had been installed in their top ranks and, perhaps from a desire to break with their predecessors’ ways, had largely “thrown out” the consultants, as some of the thrown-out describe their departure. ([Location 4568](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4568)) - Tags: [[blue]] - A consultant who did millions of dollars’ worth of projects on this front tells how the process worked: “We’d go through the list of all the bank’s payables and tag them according to the vendors—this division was paying IBM so much for desktop computers, another paying another part of IBM a lot for mainframes. We’d ask the bank’s chief technology officer if he was sure he was getting the best possible deal, and he’d say Absolutely; IBM guaranteed us we were getting the lowest price available.’ But when you aggregated all that the bank was spending with IBM, it turns out the figure was huge, and armed with that information the bank could negotiate much better prices.” Haven’t we heard this song before, the client not knowing its own costs as well as it needs to, say, from the dawn of the revolution? ([Location 4589](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4589)) - Tags: [[blue]] - The consultants helped their clients save millions, but the originators of the most exciting, complex, and ultimately destructive sources of new wealth for the banking powerhouses were another variety of wizards, the quants. ([Location 4596](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4596)) - Tags: [[blue]] - two disciplines—or “conversations,” in the largest sense—had come to dominate thinking about business. One was strategy; the other finance. ([Location 4597](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4597)) - Tags: [[blue]] - But elsewhere, even as Y2K fears and then the September 11 attacks piqued corporate interest in risk management, the consultants had mostly left the subject to others, often to the client’s “chief risk officer,” himself or herself usually a subordinate of the CFO and not typically a member of the client’s inner councils on strategy. ([Location 4621](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4621)) - Tags: [[blue]] - most consultants will allow that in their advice they failed to make sufficient provision for risk, particularly systemic risk. Their analytics, like those of the quants, had done such a wonderful job of chopping the world into small, measurable pieces that they could not foresee how the bits, with the risk inherent in each supposedly mitigated by distribution across a wide population of owners and operators, could suddenly seize up together into a nonworking, credit-frozen-up, risk-all-concentrated-in-the-same-damn-spots whole. ([Location 4624](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4624)) - Tags: [[blue]] - By this point, the fair-minded observer might reasonably conclude that while strategy and its champions may not have been a main causal factor in bringing on the global financial crisis, they did not do much to avert it either. ([Location 4642](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4642)) - Tags: [[blue]] - while consultants may have abetted the process, they weren’t the ones who elevated shareholder value (a.k.a. the stock price) to its place as god above all others. That was Wall Street, egged on by swinish types like you and me, who came to expect our investment portfolios and 401(k) plans to increase in value by 10 percent a year. ([Location 4649](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4649)) - Tags: [[blue]] - Customers? Who are you talking about? Laws in every state prohibit automakers from selling a car directly to you or me; the sale has to go through a dealer, which the car companies came to regard as their real customer, with predictable, dismal effects. Costs? Easier to buy a few more years of peace with the United Auto Workers—kick the can down the road a little farther—even if it means that it costs us a few thousand more to make each vehicle than it does those devils from abroad. Competitors? Per the quotation from Henry Ford II in the preface, what do foreigners with their little “shitboxes”—his term—know about making real cars? ([Location 4664](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4664)) - Tags: [[blue]] - Without strategy and strategy consultants, we could have broad swaths of the U.S. industry that look like the automakers—that is, uncompetitive on a global basis (as are, for instance, many sectors of the Japanese economy once you get beyond automobiles and consumer electronics). ([Location 4669](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4669)) - Tags: [[blue]] - Boston Consulting Group canvassed nearly twenty global companies—corporate titans from India and Japan as well as Europe and the United States—on the giants’ latest thinking about strategy. More than one replied with a version of, “We don’t do strategy.” ([Location 4679](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4679)) - Tags: [[blue]] - Indeed, when the consultants probed for the reasons behind the companies’ response, much of what they turned up was dissatisfaction you might have heard two or three decades ago. With the world changing so fast, how can we make forecasts about the future? The old concepts and frameworks don’t seem to make sense of the river of data pouring in on us. What good are a bunch of plans that just end up in binders sitting on the shelf? ([Location 4684](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4684)) - Tags: [[blue]] - Yes indeed, the length of time a company might expect its competitive advantage to last had steadily declined since the 1960s, reflected in a surge upward in what the consultants not-so-charmingly called “the positional volatility of leaders.” Even while a few corporations were growing to a size larger than many governments, in most businesses, being the biggest was less and less likely to make you the most profitable. With a value-chain analysis in hand, companies were increasingly eager to outsource some of their activities, not just information technology and human resources but also procurement and logistics. And in a particular irony, just as many companies were realizing that people were the key to their future strategic success, they were also discovering that shareholder-value-driven pressures to work longer hours coupled with heightened job insecurity were making employees more likely to feel unmotivated and disenfranchised. ([Location 4689](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4689)) - Tags: [[blue]] - Put that question to consultants from BCG, Bain, McKinsey, and other firms, and you will find the same word coming up in the answers from each: strategy will necessarily become more adaptive. ([Location 4696](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4696)) - Tags: [[blue]] - Instead of headquarters dictating a strategy based on “analysis, prediction, and deduction,” the goal would be to set “optimal conditions for the continuous emergence of superior strategies through an adaptive—or evolutionary—process.” In concrete terms, this would mean giving more responsibility for strategy to the people on the corporate “periphery,” the troops in daily contact with customers, competition, and changing market conditions. ([Location 4703](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4703)) - Tags: [[blue]] - adaptive strategy would require distinct competences on the part of a company, and one übercompetence in particular: what they italicize as “learning how to learn across industries.” ([Location 4708](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4708)) - Tags: [[blue]] - Note: Learning how to learn is THE skill. Makes you adaptive - Our history suggests four issues in particular that will press on the strategic consciousness of companies, whether that consciousness is centralized or more widely distributed: risk, boundaries, corporate purpose, and, as the apostles of the new adaptiveness suggest, figuring out for the twenty-first century how to power a company’s strategy with the maximum energy and imagination available from its people. ([Location 4718](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4718)) - Tags: [[blue]] - As the recent turmoil in the world’s financial markets brings home, calculations of risk need to be constantly reexamined as the global economy evolves, and disturbing new possibilities somehow taken into account. ([Location 4723](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4723)) - Tags: [[blue]] - In some ways, the challenge to strategy here is another one related to integrating the human element, namely, finding a place in strategy’s deliberations for judgment, even intuition, that can hold its own with the numbers. ([Location 4730](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4730)) - Tags: [[blue]] - Throughout its first fifty years, strategy has tussled with boundary questions. What’s the right way to define our market or to segment it? Which activities should be included in this business unit? How broad a scope must we consider for our value chain? ([Location 4732](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4732)) - Tags: [[blue]] - The tightly bounded company so long at the core of strategy’s deliberations increasingly seems a limiting assumption. The twenty-first-century version of the discipline will have to offer more help if, or when, the dominant verb for corporate behavior becomes not compete, but something like co-create. ([Location 4741](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4741)) - Tags: [[blue]] - “I’m saddened and offended by the idea that companies exist to enrich their owners. That is the very least of their roles; they are far more worthy, more honorable, and more important than that.” ([Location 4747](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4747)) - Tags: [[blue]] - In March 2009, Jack Welch—of all people—told the Financial Times that “on the face of it, shareholder value is the dumbest idea in the world.” The man once viewed as the poster CEO for value creation went on to explain: “Shareholder value is a result, not a strategy,” and, more surprisingly, “Your main constituencies are your employees, your customers, and your products.” ([Location 4750](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4750)) - Tags: [[blue]] - Dick Foster, quoted earlier placing the shareholder at the absolute top of the capitalist food chain, has changed his mind in the wake of the financial meltdown. He now believes that the crisis has completely discredited the efficient-market hypothesis, the theoretical underpinning for the idea that the stock market knows best about the value of an enterprise. The turmoil also confirmed his belief, first enunciated in his book Creative Destruction, that management’s actions can affect no more than 20 or 30 percent of what determines a company’s stock price. ([Location 4753](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4753)) - Tags: [[blue]] - Foster is radical in his apostasy. The consensus emerging among strategy consultants, and seemingly what Jack Welch was getting at, is that the recent paroxysms should remind us that shareholder value is not something to be tracked quarter by quarter, much less trading day to trading day. It is, rather, an edifice that takes years to construct, four or five at a minimum. ([Location 4759](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4759)) - Tags: [[blue]] - Higher profits have also entailed relentlessly pushing costs down—strategy abetted by Greater Taylorism—and the largest line item for most companies is still its people. Strategy had already helped shred the old social compact between employer and employee. ([Location 4768](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4768)) - Tags: [[blue]] - Over the last ten years, the additional pressure from globalization on these trends has led to an increasingly lopsided distribution of incomes—the CEOs, deal-doers, and strategy-makers getting a larger share of the wealth generated; and a squeeze on what used to be known as the middle classes. ([Location 4772](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4772)) - Tags: [[blue]] - Are we now, as a society—or a number of societies all inhabiting a capitalist world—ready to rethink our reliance on market mechanisms to produce the larger good? Are we prepared to sacrifice a degree of corporate profitability if that were to bring with it lessened extremes of wealth and poverty? What would be the right way to think about the goals of a corporation if the superordinate goal were not to maximize the wealth of its owners, the shareholders? And would an accounting that somehow, finally, accurately reflected all the ways employees contribute to corporate success make for organizations less inclined to chew up people? ([Location 4778](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4778)) - Tags: [[blue]] - In seeking models of an organization that succeeds in weaving together corporate purpose, first-rate analytics, and individual aspiration, the quest might start with the very consulting firms that gave intellectual structure to the rise of strategy. At their best, BCG, Bain, and McKinsey apply the same empiricism and rigor to the management of themselves as they do to client work. ([Location 4801](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4801)) - Tags: [[blue]] - Consultants are evaluated after every project, and junior members of the team appraise the performance of their managers. Aspirants who are not going to make it to partner are given lots of warning and often helped to find a new position elsewhere. (Among the firms’ most valuable assets, assiduously cultivated, are their networks of alumni proud to have been part of the endeavor.) Partners evaluate one another on a variety of dimensions, not just the ability to land clients (again, when the consultancies are at their best). They also elect the leadership of the firm, this for fixed terms and without politicking so overt as to leave lasting wounds. ([Location 4805](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4805)) - Tags: [[blue]] - Most of all, it seems a form that encourages members to venture down the paths where curiosity, imagination, and entrepreneurial energy lead them. In conversations with these new-style intellectuals, I repeatedly heard, “The firm is good about letting you do that”—whether “that” meant chasing down a new idea, trying a novel approach to working with a client, or opening an office in Stockholm or Seoul. ([Location 4813](https://readwise.io/to_kindle?action=open&asin=B004OC072G&location=4813)) - Tags: [[blue]]