The Strategist’s Field Guide #01
Deciding your Company Strategy? Rethinking your Priorities?
You must consider the Four Riders — guardrails for your Strategy process.
These Principles of Strategic Discipline will help your firm focus on what matters.
Read our first field guide on Strategy to find out more!
In a Nutshell
Strategy Demands Discipline for Success. But how do you develop it?
Drawing from one of nine Principles of War and analyzing successful Strategies from Disney, IBM, Apple, and P&G, we determined Four Principles of Strategic Discipline. These simple yet powerful rules are the Four Riders, a framework to guide your firm’s Strategy —
- Strategy is about picking the right Priorities — select trade-offs that fit the vision together
- Priorities are a test for Execution — discard the actions that don’t meet the priorities
- Execution is about the Economy of Forces — allocate minimum resources to secondary objectives
- Economy of Forces is a test for Strategy — don’t pick too many priorities
These riders come together in a virtuous circle — a powerful and elegant symmetry for the modern strategist. It provides you continuous guidance at every stage of your Strategy process. You can start applying it at any time.
Let us know what you think.
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3,586 words | 14’56” reading time | 55/100 readability (similar to NYT)
The post quotes Appendix A of the fifteenth edition of US Army’s Field Manual 3 —0 to introduce the concept of Economy of Forces.
The US Army introduced the fifteenth edition of FM 3—0 in February 2008 and rescinded it in 2011.
The US Army reintroduced FM 3—0 in 2017 with sweeping changes in the doctrine, keeping in mind the new ‘operational realities’ (euphemism for Russia, China, Iran, Korea, et cetera).
The 2017 edition does not carry Appendix A or any other specific treatment of the principles of war.
Table of Contents
- The Weatherman Goes for An Interview
- The Four Riders of Strategy
- The Fourth Quark
- Sidebar: Saucerful of Strategy
- The Fourth Quark
- Alice Under A Macroscope
- (Multiple Exhibits)
- Questions, Answers, and More Questions
- Sidebar: Origins of Pumpkingram #6
- Sidebar: Unanswered Questions
The Weatherman Goes For An Interview
Bob Iger needed a sound Strategy.
The former weatherman from Ithaca, New York, had risen through the ranks at ABC, from cleaning sets in 1974 to become its President and COO in 1995. Disney began acquiring ABC in 1995, and within five years, Iger had risen again to become the President and COO of the merged entity.
Now, in the fall of 2004, he had a real shot at becoming the CEO of Disney.
Iger had been the shy, diminutive understudy to Disney’s larger-than-life CEO Michael Eisner. And while Eisner had brought Disney a long way from the doldrums when he was hired for the top job in 1984, the decade since 1994 hadn’t been kind.
Eisner’s ego and micromanagement were widely considered the source of Disney’s problems. That included high profile and acrimonious executive exits and reduced creativity in animation, live-action, and television. More recently, 9/11 had seriously dented attendance at Disney’s theme parks in the US. The result was an underperforming stock.
All that had brought Disney to November 2003, when things began moving at dizzying speeds. Two influential board members, Roy Disney and Stanley Gold, resigned at the end of that month. They wanted Eisner out and vowed to do so from the outside.
Then in January 2004, Steve Jobs and his Pixar, the lifeblood of Disney’s animation revenues, parted ways with it. The departure wasn’t friendly.
In February 2004, Comcast initiated a hostile takeover bid for Disney, citing a mismanaged an undervalued company. The bid failed but not before a shareholder revolt.
In early March, 43% of Disney’s shareholders declined support to re-elect Eisner to the board — an overwhelming no-confidence vote. To appease them, the board stripped Eisner of his duties as the Chairman.
The board appointed a crony as Chairman in Eisner’s stead, and though Eisner continued to be the CEO, the signs were clear. Disney desperately needed a change at the top. So in September that year, after months of back and forth, Eisner announced that he would retire at the end of his contract in 2006.
He endorsed Iger to be his successor.
Outwardly, Disney’s board set itself to select Eisner’s heir by June 2005, looking at internal and external candidates. However, analysts widely believed Disney’s board to be less than independent. That meant Iger was somewhat likely to succeed.
However, given the lack of goodwill Eisner had garnered over several years and Disney’s very public troubles, his endorsement was toxic to Iger’s chances. Iger had to differentiate himself publicly and fast.
In the months following Eisner’s announcement, the board paraded Iger to shareholders, analysts, and the industry, giving him a good platform.
But, whether or not there was any truth to the board rubber-stamping him into the next CEO, Iger’s road was not going to be an easy ride. Disney was a behemoth that had now been at the end of one unsolicited takeover bid, had alienated many shareholders, and had an undervalued stock.
The revival was going to be a daunting challenge. As Iger started to prepare for the customary board interviews, one thing was clear —
He needed a sound Strategy.
The Four Riders of Strategy
Iger described an experience from those days, preparing for the top job, in his Masterclass on Business Strategy & Leadership —
As I began to think [the Strategy] through, a friend of mine who had been a marketing and political consultant — and quite a successful one — came in [...]. [...] essentially, what he was telling me was that I had to articulate what the Strategy needed to be. And in doing so, I couldn't have ten strategies. I needed to have just a few. And in fact, he asked the question, what are your priorities? And I started to list them. And when I got to five or six, he said, stop right there. I think he actually faked a yawn. And he was suggesting to me that if you are going to have strategies for the company, they needed to be just a few of them. They couldn't be many of them. The reason for that was that the more you had, the less focus there would be and the more spread out the allocation of time and capital would be.
Iger’s friend essentially asked him to embrace one of nine principles of war — the Economy of Forces — when defining his Strategy for Disney.
Strategy & The Economy of Forces
Here’s how the fifteenth edition of US Army’s Field Manual 3—0 (FM 3—0), published in February 2008, defines the principle —
ECONOMY OF FORCE Allocate minimum essential combat power to secondary efforts. [...] Commanders allocate only the minimum combat power necessary to shaping and sustaining operations so they can mass combat power for the decisive operation. This requires accepting prudent risk. Taking calculated risks is inherent in conflict. Commanders never leave any unit without a purpose. When the time comes to execute, all units should have tasks to perform.
The ‘decisive operations’ mentioned above translate to strategic priorities in business. Everything else is a secondary effort.
‘Forces’ would translate to Time, Capital (financial & human), and Innovations & Intellectual Property — resources vital to any business.
The principle of Economy of Forces pushes a strategist through the logic below —
- Resources are likely to be limited, caveated, and/or uncertain (see next section).
- Therefore, one can’t pick all the ‘battles’ or ‘operations’ with the same zeal
- Accordingly, we allocate minimal resources to secondary efforts. [This is Economy of Forces]
- That allows a majority of resources to focus on strategic priorities.
- These are the priorities that will help us gain an overwhelming advantage.
- Whereas secondary efforts do not result, directly or indirectly, in such an advantage.
- Therefore, please clearly identify the strategic priorities and the secondary efforts. [This is Strategy]
That last point above is any strategist’s job description. Strategy is about picking the right battles, the decisive operations, the objectives, or priorities.
Necessarily, then it is also about identifying secondary efforts so the firm can discard, deprioritize, or defer them.
The very act of identifying specific strategic priorities deprioritizes other actions. Trade-offs are therefore inherent to Strategy.
These trade-offs must be decisive — i.e., asymmetrically consequential to the firm’s vision, compared with other possible choices.
Additionally, the selected priorities have to make sense together in achieving a firm’s objective. Otherwise, conflicting priorities will lead to conflict over resources or to outcomes that do not fit together in a complete whole.
We can wax eloquent about the topic but Steve Jobs does a much better job of that in his famous Animal Farm speech from WWDC 1997. Take a look.
The Three Quarks of Strategy
In Pumpkingram #6, we set out to determine if Strategy is the Economy of Forces. Such a statement will be pretty reductive. We believe we have a better, more nuanced take.
Think about what we discussed above Strategy. Sum it all together and you get, with due respect to James Joyce and his Finnegan’s Wake, the first ‘quark’ of Strategy —
- Strategy is about picking the right Priorities — select trade-offs that fit the vision together.
On the other hand, Economy of Forces better represents a desirable attribute of the Execution of Strategy instead of Strategy itself.
After all, Execution is about correctly deploying a firm’s resources, including executive oversight, among its strategic priorities.
If the firm’s resources are assumed to be limited, caveated, or uncertain, that means reducing distraction of resources to secondary objectives.
That leads us to the second quark —
- Execution is about Economy of Forces — allocate minimal resources to secondary objectives.
Sidebar: Paging Mr. Porter
Then what is the connection between Strategy and Economy of Forces?
It has to do with the train of logic we developed between the two in the previous section.
Economy of Forces compels the strategist to clearly identify (and distinguish) strategic priorities and secondary objectives.
Say you are looking to allocate strategic resources to an objective. You must ask four questions —
- Should we allocate the resources?
- Can we allocate the resources?
- Can we obtain the resources?
- Should we obtain the resources?
If the answers are not an emphatic Yes, you are effectively agreeing to allocate minimal (or may be zero) resources to the objective, thus making it secondary.
Intuitively, it makes sense.
If everything is a priority, then nothing is a priority and you risk mistaking some secondary objectives to be strategic. Therefore, you can’t have too many strategic priorities.
Invoking Bob Iger, “the more you have, the less focus there would be and the more spread out the allocation of time and capital would be.”
That gives us the third quark.
- Economy of Forces is a test for Strategy — don’t pick too many priorities.
So, we now have three ‘quarks’ that summarize our conversations up to this point on Strategy, Execution, and the Economy of Forces. You must consider them together, as part of a set —
- Strategy is about picking the right Priorities — select trade-offs that fit the vision together.
- Execution is about the Economy of Forces — deploy right resources to serve the right priorities.
- Economy of Forces is a test for Strategy — don’t pick more than a few strategic priorities.
Michael Porter’s thoughts on Strategy, cross-bred with our discussions.
Execution of Strategy — the big swings or bets
The Fourth Quark
That yawn faked by Iger’s consultant friend makes more sense now. It compelled Iger to articulate a powerful three-point Strategy for Disney (reproduced verbatim) —
- Invest most of Disney’s capital in high-quality branded content, i.e., creativity.
- Use technology to make more compelling content and to reach people in more innovative ways.
- Grow globally, deepening connection to markets around the world.
He sold the board on his Strategy successfully. Later, as Disney’s CEO, he would hammer his message repeatedly to his lieutenants as well.
He also conducted an internal campaign of town hall meetings across the company’s offices worldwide. His mission — to inform and convince the employees of his three-point Strategy.
They all got the message. Iger’s three-point plan took Disney to a new era of success.
Disney’s Stock Price, USD, (Sep 2005 — Feb 2020)
Disney’s Market Cap, Billion USD, (Sep 2005 — Feb 2020)
Sidebar: Saucerful of Strategy
If you consider the big swings Disney took under his leadership — acquisitions of Pixar, Marvel, Lucasfilm, and 21st Century Fox over 15 years — they all fall in line with his Strategy.
That is what the right strategic priorities do — they consistently guide Execution. You can test any executive action with a simple question — “Does it meet the organization’s strategic priorities?”
If it doesn’t pass the test, you discard it and move on to other pastures. That gives us the fourth quark of Strategy —
- Strategic Priorities are a test for Execution — discard the actions that don’t meet the priorities.
When we say Execution or Executive Action, we are making a distinction between the big swings (e.g., setting up a new manufacturing plant investing millions of dollars) and the quarter to quarter operations of the firm. It is the big swings we are referring to here.
The quarks identified here are the Four Riders of Strategy — simple yet powerful Principles of Strategic Discipline that fit together in a virtuous circle.
The virtuous circle of the Four Riders is a talisman for the C-suite. It provides you continuous guidance at every stage of your Strategy process.
You can start applying these principles at any time. It doesn’t matter whether you are defining a new Strategy, revising an old one, or implementing it for success. Use these rules to cultivate corporate discipline. Strategy demands it for success.
Alice Under A Macroscope
Our argument behind the Four Riders rests on a critical assumption — resources are limited, caveated, and/or uncertain.
We believe it is crucial to examine the truth of that assumption as it may define the nature and future of the Strategy itself.
That’s the purpose of this section — examining the core assumption. You may choose to skip it in first reading as it is heavy on details. However, it is an important read for the serious strategist.
First, let’s iterate the meaning of resources in the strategic context of a firm — Time (including that available for Executive Oversight), Financial Capital, Human Capital (People & Skills), and Innovations & Intellectual Property (IP).
We will now look at the exhibits of trends in some of these areas in some detail. Our purpose is to determine the robustness of our assumption, understand what the future may hold for it, and provoke your thinking.
These considerations reveal trends and trade-offs that support the assumption that has driven our discussions so far.
E.g., trade-offs such as access to capital v/s risk of insolvency or increase in productivity v/s widening skills gap.
Time & People — Increasing Productivity but Increasing Skills Gap
Modest Rise in Productivity Levels
Measured in terms of GDP per Person Employed, Productivity has increased at a CAGR ~ 2% globally since 2010 (hover on or tap the dots to see the year and corresponding GDP).
A Simmering Skills Gap
However, per the staffing firm Manpower Group, the skills gap has widened over the last 15 years. Their latest survey features 42,000 employers in 43 countries. Nearly 69% of these employers are having difficulty filling jobs.
The problem of the Skill Gap isn’t going to go away anytime soon. Nearly 87% of the companies surveyed worldwide by the consulting firm McKinsey “have a skills gap, or expect to within a few years.”
The Promise of AI?
Surely, advances in Machine Learning and Artificial Intelligence (AI) will help close some of these gaps. However, it is instructive what IBM — the world’s largest patent holder in AI as of this writing — has to say about a skills gap in the field of AI itself. Go figure.
In its 3rd edition of State of AI in the Enterprise, published in July 2020, Deloitte similarly reported a skills shortage in AI. Skill gaps challenge even mature AI adopters.
The discussion here should give you a sense of where firms stand in terms of Human Capital and its skills gap.
Capital & Venture Finance — Increased Access but Increasing Risk
Access to Capital
Access to Capital has generally improved globally. Loose monetary policies in place since the Global Financial Crisis of 2008 have made sure of that. One way to gauge the access is to consider the Yield (to Worst) and Spread (e.g., v/s US Treasury Bonds) for Junk Rated Corporate Bonds.
Junk bonds generally carry a higher risk of default and therefore provide higher yields to offset the risk. That is the reason why these bonds are also called high-yield bonds.
The % Yield on these bonds and % Spread v/s more stable instruments measure the risk on these bonds. The lower the yield and spread, the higher the investor confidence. The higher the investor confidence, the easier it is for companies rated below investment grade (by rating firms like Moody’s, Fitch et cetera) to raise capital by issuing these bonds.
The logic behind considering these bonds as a measure of access to capital is that if junk-rated companies can raise capital easily, the market should be easier for investment-grade firms.
So, here’s the dirt — yields and spreads on junk bonds are at or close to their lowest levels since 1997!
That’s true for junk bonds in the US, Europe, and bonds with Emerging Market risks issued in the international market. Central Banks have bought these bonds in massive volumes, artificially propping the confidence.
It has never been easier to raise money than now since the turn of the century. See the charts below. You can access the originals (and latest views) here.
The Risk of Insolvency
However, the risk of insolvency in 2022 is forecasted to be at its highest since the 2008 – 09 Global Financial Crisis. Indeed the risk, as measured by the Euler Hermes Global Insolvency Index, has been increasing since 2016.
The Index fell somewhat in 2020 as Governments extended insolvency protection to companies in the wake of the pandemic (and intermittent operation of Business Courts).
However, delayed transmission is likely to show its effect from 2021 onward. So while there may be more capital on offer, default risk for companies is also increasing, calling for robust Strategy and Execution in the face of uncertainty.
Other Measures, Sustainability of Current Climate, and A Looming Crisis
There are other ways to assess access to capital. E.g. —
- MSCI ACWI + Frontier Markets Index based on Market Capitalization of investable equities across 81 markets | See June 2021 report.
- Global Corporate Debt | See here and here. Download the World Bank report here.
These measures also point to an abundance of ease in access.
However, there is a growing concern about the sustainability of the current investment climate (e.g., see here, here and here). Tightening monetary policies may spell doom. As we write this on July 28, 2021, the US Fed has already started discussing plans to taper its bond purchases.
A reflection of the above is the Global Economic Policy Uncertainty Index, which, as of May 2021, remains higher than most months on record since 1997 despite a 50% reduction since November 2020.
That risk underlines the need for solid strategic imperatives for corporations.
Even without these concerns, the basics of financial performance remain the same, and analysts worth their salt would still look at liquidity. Growing debt levels may provide access to capital but don’t do a world of good to those measures unless offset by suitable cash flows.
The View on Startups
Access to capital has improved manifolds for startups. 2020 was a marquee year for Venture Financing despite the pandemic. Median Deal values have gone up regardless of stage or series of funding, as has the total global deal value.
See data below from KPMG/PitchBook as of Q4 2020. As of Q2 2021, all metrics are outperforming 2020 and 2018.
However, startup failures remain high.
Recent research is scarce, and we have not accessed credible sources like PitchBook or Crunchbase on failure rates. However, one can build a view from sources, old and new, that we found insightful and cite here — e.g., see Failory, CB Insights (plus this), Forbes, Journal of Empirical Entrepreneurship (very nuanced, loved it!), and Stryber.
Also telling is a 2019 submission by the National Venture Capital Association (NVCA) of the US to that country’s Bureau of Industry and Security. It cites some failure statistics (see Page 5 here). We reproduce the assertions verbatim (emphasis ours) —
No other asset class or any government entity is willing to take on the same level of risk as venture capitalists, given the incredibly high failure rate of high-growth startups and the long-term horizon for a successful company to materialize. According to one 2012 study, 30-40% of startups end up liquidating all assets, with investors losing all their money. Even more tellingly, 95% of startups fail to provide the projected return on investment. Furthermore, the median time from the first VC financing to IPO is more than 7 years, with areas such as healthcare extending out much further.
In essence, access to capital isn’t a determinant of Startup success. We hypothesize that robust Strategy and sound Execution remain as vital to Startup success as ever.
We recommend the readings found here and here.
Time & Uncertainty — Increasing Uncertainty and Decreasing Time to Respond
“Disruption is becoming more frequent and more severe,” says McKinsey citing indicators of risk on different dimensions.
Consequently, organizations will have less and less time to respond to threats — further motivation, we believe, to make decisive trade-offs that fit the new realities.
IP — Increasing Registrations and Royalties but Increasing Innovation Gap
The Rise of Intellectual Property & Its Use
We cite four charts in support of the title above. First, patents granted worldwide between 1985 and 2019 —
Second, trademarks registered worldwide between 1985 and 2019 —
Third, industrial designs registered worldwide between 1995 and 2019 —
And finally, worldwide charges for the use of IP since 1960 (hover on or tap the dots to see the year and corresponding Balance of Payment for IP royalties) —
A Glitch in The Matrix?
The tailwinds in IP haven’t translated smoothly into scalable innovation. Consider two exhibits on Innovation Readiness Gap from BCG’s report on Most Innovative Companies, 2021.
BCG ranks surveyed companies “on a 100-point scale that reflects best-practice maturity” on “ten essential factors related to their [innovation] processes and capabilities.” Companies that score 80 or above are considered ready to scale innovation.
Per Exhibit 1, only 20% of the surveyed 1000 companies are ready to scale innovation as 2021.
Exhibit 2 dives deeper to reveal “worrisome gaps in readiness even among committed innovators (those that invest significantly in their priorities).” BCG states that 74% of these committed innovators are still not ready as per their metrics.
These statistics support our core assumption as they cast shadows of caveats & uncertainty in scale on the abundance of IP & its access.
Access to Natural Resources
Natural resources form a large part of industrial inputs. Such resources are inequitable among geographies, to begin with.
Access to capital doesn’t always translate into access to these inputs. Therefore, we believe that a dedicated look at access to natural resources is needed as well.
Unfortunately, we have not yet identified a credible time-series indicator for that measurement. Consequently, you don’t see any trends captured here. We intend to rectify this shortcoming in the future.
Suggestions are welcome.
The metrics we track above may not represent the complete picture but are sufficient for our current purposes.
We believe there is a need to explore the subject further and strengthen our argument — something we intend to do in future posts.
Therefore, as you consider these provocations, bear in mind that we are merely laying the groundwork for a fuller analysis at a future date.
Would you please provide your builds and feedback so we can incorporate them in future research?
Questions, Answers, and More Questions
The Strategist’s Field Guide #01 — the one you are currently reading — started as an exploration of the quote, “Strategy is the Economy of Forces.”
In tracking down its suspect origins (see sidebar — Origins of Pumpkingram #6), the quote got us thinking about Strategy and its relationship with the principle of Economy of Forces.
Sidebar: Origins of Pumpkingram #6
And in debunking its dubious message, we uncovered the Four Riders — powerful principles for strategic discipline.
It’s an elegant symmetric take, one that will serve you well in your pursuit of robust disciplined Strategies in these uncertain times.
As with our other explorations, we have discovered new questions (see sidebar — Unanswered Questions) in the process of writing this first field guide.
We will expand our research to answer these questions in the coming months.
Sidebar: Unanswered Questions
However, first things first.
This field guide has focused on articulating principles to guide your firm’s Strategy process.
But what is that process? What are the milestones a firm crosses in its Strategy journey? How do they connect with each other?
These are the questions we will tackle in our Field Guide #02. See the sneak preview below.
Stay tuned, stay safe!