Good Strategy, Bad Strategy | Richard Rumelt

Richard Rumelt is a legend in the world of strategy. He’s the author of Good Strategy/Bad Strategy and The Crux: How Leaders Become Strategists, both of which are often recommended by guests on this podcast. From his early days teaching in Iran at a Harvard-sponsored business school to teaching at Harvard Business School itself to over four decades teaching at UCLA’s Anderson School of Management, Richard’s impact resonates globally. His strategic insights are sought after by major corporations including Microsoft, Shell, Apple, AT&T, Intel, and Commonwealth Bank and by governmental organizations such as the U. S. Army Special Operations Command. In this episode, we discuss: • The essential components of a good strategy • The importance of coherence in strategy • Common pitfalls that create a bad strategy • How “power” plays into strategy, and common sources of power • The value of knowing history when developing effective strategies • Why a strategy should simply be called an “action agenda” • The need for one decider in an organization — Brought to you by: • CommandBar—AI-powered user assistance for modern products and impatient users: https://www.commandbar.com/lenny • Miro—A collaborative visual platform where your best work comes to life: https://miro.com/lenny • Vanta—Automate compliance. Simplify security: https://vanta.com/lenny Find the transcript and references at: https://www.lennysnewsletter.com/p/good-strategy-bad-strategy-richard Where to find Richard Rumelt: • Email: [email protected] • LinkedIn: https://www.linkedin.com/in/richard-rumelt-18520828/ • Website: https://thecruxbook.com/ Where to find Lenny: • Newsletter: https://www.lennysnewsletter.com • X: https://twitter.com/lennysan • LinkedIn: https://www.linkedin.com/in/lennyrachitsky/ In this episode, we cover: (00:00) Richard’s background (04:29) What is a strategy? (06:23) The essential components of a good strategy (the “kernel”) (15:04) An example of good strategy (16:55) Bad strategy (25:17) The importance of focus and power (28:19) Identifying and utilizing power (34:38) Types of power (41:13) Implementing power (48:15) The importance of historical knowledge (55:23) How to write an action agenda (01:02:47) The crux (01:10:40) Challenges to executing a strategy (01:15:44) The need for a decider (01:20:39) Strategy for startups (01:26:04) Richard’s “value denials” exercise (01:31:01) Closing thoughts (01:33:57) Lightning round Production and marketing by https://penname.co/. For inquiries about sponsoring the podcast, email [email protected]. Lenny may be an investor in the companies discussed.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Don't call it a strategy. Call it an action agenda. Huge numbers of people out there willing to sell you advice on mission and your vision and your values. All these things that have to be in place before you can have a strategy. That's not true. We begin to try to identify the one or two key challenges that can actually be addressed. And what are we going to do about it? What are the coherent actions we're going to do to take these on? Okay, we're gonna, we're gonna go after this. And here's the action steps we're going to take to do that. That's essence of what you're doing when you're thinking strategically.

• 0:42Lenny Rachitsky?

  Today, my guest is Richard Rumelt. Richard is an absolute legend in the world of strategy. It was such an honor to have him come on the podcast. He's the author of Good Strategy, Bad Strategy, which I've gifted to countless people who wanted to become more strategic. He's been mentioned so many times on this podcast. He's also the author of The Crux, his most recent book, which some consider his best book, which delves even further into his advice on how to craft a winning strategy. Richard was a longtime professor at UCLA Anderson School of Management, was on the faculty of Harvard Business School, and he's consulted on strategy with companies like Microsoft, Apple, and Intel, and also with government organizations like the US Army Special Ops Command, and folks like Donald Rumsfeld. In our conversation, Richard shares the concrete elements that make a good strategy,

• 1:28Lenny Rachitsky?

  why we'd be better off calling them action agendas rather than strategies, why every great strategy starts with a clear diagnosis of the biggest challenge that you face. Also, how to actually lay out a strategy, why organizational dynamics are often the biggest hindrance to winning strategies, and so much more. I could keep going, but let me just say we cover a lot of ground in this episode, and Richard shares incredibly thoughtful and deep answers to each question. I am excited to bring you Richard Romelt after a short word from our sponsors.

• 1:58Lenny Rachitsky?

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• 2:41Lenny Rachitsky?

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• 3:21Lenny Rachitsky?

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• 4:05Lenny Rachitsky?

  like the sticky notes, the inline comments and charts, and also the really cool diagramming tools. Check it out at miro.com/lenny. Your first three Miro boards are free when you sign up today at miro.com/lenny. Find simplicity in your most complex projects with Miro. That's M-I-R-O dot com slash Lenny.

• 4:29Lenny Rachitsky?

  Richard, thank you so much for being here and welcome to the podcast.

• 4:33Speaker 00

  Thank you for having me, Leni.

• 4:34Lenny Rachitsky?

  It is such an honor to have you on this podcast. So many guests on the podcast have mentioned you and mentioned the book. I probably bought your book for, I don't know, dozens of people over the years and it is just so cool to have you on and to get to delve into the stuff that you teach. So, thank you again for being here.

• 4:50Speaker 00

  Thank you.

• 4:51Lenny Rachitsky?

  I thought we'd start at the beginning and then work our way up and kind of see where the conversation goes. What is the simplest way to understand a strategy? What is a strategy? And then what are the essential components of a good strategy?

• 5:05Speaker 00

  Well, a strategy is a design for overcoming a high stakes challenge. It's a mixture of policy and action designed to deal with a challenge. The challenge could have an upside. It could be, oh geez, we were fooling around in the back 40 and we discovered where we're going to do. Or it could be negative. It could be that the new innovation is driving us out of the market. But a challenge is just the hardest strategy. The word comes from strategos, which is Greek for, the Greeks elected 10 strategoi to serve as strategic leaders at Athens. And

• 5:48Speaker 00

  they were elected and they dealt with the issues of the day. The Persians are invading, there's plague in town, we need money for a new temple. And that's where the word comes to us from. It isn't just military. It wasn't to Athens. So, strategy is always about dealing with

• 6:13Speaker 00

  an issue, a challenge, a problem. What are we going to do about global warming? What are we going to do about China wants to reunify with Taiwan?

• 6:23Lenny Rachitsky?

  You obviously have these very infamous, famous elements of a good strategy, something you call the kernel. Can you just talk through those pieces?

• 6:32Speaker 00

  Right, sure. So, when I used to teach strategy for many years at Harvard and then at UCLA and other places.

• 6:44Speaker 00

  There's lots of ways of looking at strategy. And so years and years ago, we thought that the Lorternicur and the Matrix and the Five Forces and all of those kinds of analytical tools. And it began, don't underestimate this is a strategy. These are analytical tools for analyzing the problem, for thinking about things, for looking at competition. They're not strategy. Strategy is one. Now, I started to write a book. And the first chapter of the book was, the first part I wrote was the David and Goliath strategy story.

• 7:26Speaker 00

  And my point in writing about David and Goliath was that the surprise that David is able to beat this giant warrior. And that's a strategy story. Strategy story is about discovered strength. It's about, oh, look at, look at how they did that. Look at how he got made in five moves. Look at how, that's a strategy story. Look at how Steve Jobs changed the world when people couldn't expect it. That's the emotion of a strategy story is. So I wanted to write about strategy. And my wife, Kate, asked me, well, do you define strategy? I said, oh, it's really hard. I can't define it.

• 8:11Speaker 00

  And she said, well, you can't write a book about it if you can't define it. Because I have this other conception scheme in my head, that the whole teachers and writers had, which is that there's a bunch of analytical tools. And, you know, this is back in 2005, 2004. And I gradually came to the realization, oh, strategy is problem solving. It's a form of dealing with challenges. And that was a basic idea going ahead in the book. So if that's the core of it, what's the basic activity? What are you doing when you create a strategy? Well, you're, you're diagnosing the situation. You're trying to figure out what's going on here.

• 8:54Speaker 00

  What's the nature of reality that you deal with? Now, humans can't understand all of reality. No one can.

• 9:04Speaker 00

  So part of what a diagnosis is, is a decision about what you're going to pay attention to. And a hypothesis, or several hypotheses, hypotheses about what worked, what's going on, how do things connect together? And that's the beginning of the diagnosis. And so diagnosis is an understanding of the situation that you're in. Well, that's not enough. And you could use any of those tools that are famous for that, and you can try to fight forces, you can do any one of a number of things to try to comprehend the situation. The world is more complicated than two by two, so.

• 9:49Speaker 00

  I was educated as an electrical engineer, and my early years were spent designing spacecraft for NASA. And when I got into looking at business and business strategy stuff, I was always amazed at how unintelligent it was. You know, that you're struggling to master Z transforms and multiple, and yet these people are looking at two by two diagrams, and saying, oh, that's, that's what the company's about. So a rich diagnosis of the situation, but then a guiding policy. The guiding policy is, is, is what are we going to do?

• 10:33Speaker 00

  Now, it's a simple thing to say, a guiding policy, and then the guiding policy is, is sort of the strategy. It's the core of it. It's, it's here's how we're dealing with the situation. And yet, when I say that, it flies in the face of, as I was writing that, I had a client who had 17 priorities. This is what we're doing. We have 17 priorities. And that's the opposite of a big policy. That's a laundry list of all the things we wish were happened over the next year.

• 11:11Speaker 00

  We're gonna gain market share in China, we're gonna cut our emissions, we're gonna save energy, we're gonna be safer, we're gonna cut costs, all these different things that we're gonna do. And they're all priorities. Now, lots of people misuse the word priority when they're trying to do all that. You wouldn't want to be in a commercial airplane and hear the tower say to the pilot, I'm giving priority to the following three planes, long runway five. You know, right away, you know, there's something wrong. Well, that's the word priority, it means the first.

• 11:53Speaker 00

  It doesn't mean the grab bag of everything that you can think of that might matter. It means what's first. And so the guiding policy is, is sort of at that level of what, what do we really have to do here? And how do we? What are we doing and what are we not doing? Do you look at the diagnosis that we create? And then the most important part of a strategy, the part that it's so easy to leave out because people like to think of strategy as this high level conceptual thing, is the coherent action. You, you have to do something. And what you do has to be coherent in several ways.

• 12:36Speaker 00

  The first way is it has to deal with the problem or the diagnosis and, and the guiding policy, it has to implement. It has to be coherent in that you shouldn't do things that fight each other. You shouldn't say, oh, we are going to burn less oil and at the same time, we're going to import more oil. I don't, doesn't make any sense to do things that are self contradictory. And yet, people do it.

• 13:11Speaker 00

  You know, most companies have strategic goals of increasing growth and increasing profit.

• 13:21Speaker 00

  Magically, that can happen in some cases. Growth and profit are, they bad in each other.

• 13:29Speaker 00

  Let's say we define profit as return on equity. Well, if, if, if you're going to increase growth and increase return on equity, how do you do that? Because you're, you're basically going to invest less to get your return on equity. Or you're going to grow and get your profit margin up. Well, how are you going to do that? You get your profit margin up and grow faster. These are, this is baby talk. But CEO after CEO will stand up and say, well, we're going to grow and we're going to improve.

• 14:02Speaker 00

  And so having a coherent actions that are, that don't nullify one another is an important part of strategy. These are all three elements have to be there. You have to be an understanding of the situation. There has to be a guiding policy. How are we going to deal with it? And that can be a long-term sense of how we compete. You don't have to change your strategy every five minutes or every five years. If you're, if you're making almond joy candy bars or something, you don't really change your strategy constantly. If you're in the tech business, of course, you're, you have a shorter time horizon. And then the coherence and action is critical.

• 14:47Speaker 00

  And so these are, these are the three, what I call basic elements, the core that if anyone in the three is missing something from

• 15:01Speaker 00

  it's not really a strategy. It's something else.

• 15:04Lenny Rachitsky?

  Awesome. Okay. Is there an example that you could give that kind of makes these even more concrete of just, I don't know, something that comes to mind that's kind of a quick example of a strategy that illustrates these three components?

• 15:16Speaker 00

  You know, if you're Microsoft right now and you're trying to adapt to, to AI, yeah, you have a diagnosis. So let's go.

• 15:27Speaker 00

  You see the challenge of how we adapt to it. You create a guiding policy that you're going to invest in one of the major leaders and then you're going to begin to incorporate that into your search engine. And then you have coherent actions, you know, you actually do some of these things and you know, it's not, it's not rocket science. The difficulty is that companies don't do that. There are companies that say, well, our future is, let's say, something that's not in a software business. That's industry four, four year, four, five, we're going to have, we're investing in the future of

• 16:10Speaker 00

  robotics and AI and, and computer vision and all that. That's, that's going to be our future. And then you see what they're doing and they're, they bought this company, they bought this company, they bought this company. And that's it. It's strategic assembly without any synthesis. So I mean, strategy is not mysterious. What's mysterious to me, what was mysterious to me and what remains mysterious to me is how so many organizational leaders don't do it. They, they create bad strategy. They, they, they do something that they say is strategy and then it's not.

• 16:55Lenny Rachitsky?

  You have a whole chapter on this and what is a bad strategy? Can we just touch on a few of the things you see as signs that your strategy is, is bad? Or maybe it doesn't even exist.

• 17:05Speaker 00

  Sure. What I remember, good strategy, bad strategy, a lot of, a lot of people resonated with the bad strategy. Part of the book. They wrote emails and saying, oh my God, thank goodness. Someone just finally said that these long and terminal meetings I sit through are not actually strategy. Or these documents that the company produces are not actually a strategy. And they're not.

• 17:34Speaker 00

  Bad strategy, the standard bad strategy for a corporation is a set of profit goals or performance goals. A set of goals. Now, goals are the engineering of how companies work to some extent. But abstract, high-level goals, they're not a strategy. They're something else. They're ambitions. And ambitions are not a strategy. A list of all the different things you wish would happen is not a strategy.

• 18:12Speaker 00

  I was asked to help part of the US Department of Defense create a strategy for all its 17 different intelligence agencies.

• 18:26Lenny Rachitsky?

  Wow. How cool.

• 18:28Speaker 00

  Yeah, there's 17 different intelligence agencies. And the strategy, basically, that these people had written said the 17 agencies should work together more effectively. Now, you don't have to be a Russian spy to see that what they're really saying is these guys aren't working together effectively and it's a problem. But they didn't say that. They said the strategy is they're going to work together more effectively, just like the R B always comes out with, "Our strategy is to join us," meaning we're having trouble coordinating. But then there's nothing there about that, other than this is what should happen.

• 19:12Speaker 00

  There should be more effective coordination. And, "Oh, I have an officer of coordination. I need to have a person in charge of coordination." But there's no sensible, "Why is it hard to coordinate? What are the barriers to this? This has been going on for 34 years now. What's holding it back? What is the problem we have to solve?" It's not there. And so, I was hired to do a foundry for a company, and they said, "Well, our diagnosis is that we're not growing fast."

• 19:51Speaker 00

  Okay. Oh, let's, let's get into that. Because that's not a diagnosis. That's a statement. Uh, it's a statement of values. You would like to grow faster than you are. I'd like to be taller than I am. I'd like to have more hair. Well, you want to grow faster. Okay, so what's holding you back? And from Chachan. But, yeah, saying, okay, we're going to grow. That's not a strategy. Bad strategy also is fluff. People will use fancy words to describe their situation.

• 20:32Speaker 00

  Now, since I wrote that, you know, the, the term word salad has become common. And so there's a lot of word salad writing that people try to use to describe their situation. It's more abstract, perhaps more abstract. Therefore, it's more strategic. Incoherent stuff. Where we're going to do A and we're going to do B. And those two things, obviously, fight one another. All those things are part of bad strategy. Bad strategy is a document or a set of intentions

• 21:15Speaker 00

  or a set of verbalizations where it's not a strategy. There's no diagnosis. It's all. President O'Donnell started out saying, we're in the United States is falling behind in education. And he's, he's looking at the piece of the PISA test scores of 15 year olds around the world. And it's true. The United States is down in number of 30 countries in terms of the scores of our 15 year olds in math and in general knowledge. So, okay, correct statement. We're falling behind. A real diagnosis would say, because,

• 22:00Speaker 00

  because he jumped immediately to, oh, therefore, we're going to have more people go to college than any other country. Well, having more people go to college doesn't solve the problem of 15 year olds, nothing ever to do.

• 22:16Speaker 00

  Elementary math. Hopefully it doesn't screw up colleges everywhere. So that kind of gap is there. Hall where you don't do the diagnosis. Why do we have this? We argue over diagnosis is part of politics and part of organizational politics. That's what we do and that's important. To do a strategy, you have to resolve the argument. So why do we have a homeless explosion in Port or Seattle? We're all saying.

• 22:49Speaker 00

  And people argue about that. They sometimes say, oh, it's drugs. So, oh, no, housing is too expensive. They're different diagnosis.

• 23:00Speaker 00

  But you, to deal with the issue, you have to decide on the diagnosis. The politicians right now sort of decided for a period of years that the problem is housing is too expensive. We're going to build housing at $700,000 a unit and then give it to the homeless people. Oh, okay.

• 23:24Speaker 00

  If you build it, they will go. They have, but then, you know, the next problem is, well, can't seem to build a housing. And so again, you need to need diagnosis. Why can't you build that? You're a rich, powerful country. Why, why can't you build some housing? So diagnosis is critical to understanding it. And, and in public policy, we argue over the diagnosis.

• 23:48Speaker 00

  And in organizations, we argue. And unless you resolve it, you can't act. So lacking diagnosis is one of the key reasons for bad strategy. The other, the fluff and the incoherent actions are, are fun to describe, but they're less common.

• 24:08Speaker 00

  The second major source of a strategy is mistaking goals for strategy. Saying these, these goals are our strategy. And that leaves out so many of the important aspects.

• 24:21Lenny Rachitsky?

  Amazing. So just to summarize somewhat, if you're missing a diagnosis, trying to explain what exactly is wrong, it's a sign your strategy is incomplete or bad. If you're missing concrete actions, it's a sign that your strategy is incomplete or bad. There's also, I think, an element of coherence. The actions have to connect and there have to be a few, very few of them. I always like to think of three as like a good number. Is that, is that something you think about, like the rule of thirds for actions you want to take? Or even the guiding policy? Or is there like a number that you think about, just like no more than this?

• 24:53Speaker 00

  A few, a few, not too many, not so many. It's hard. Remember numbers is, you know, we work best when we concentrate. We're more effective when we concentrate on a few things, a few people, a few focuses. It's the fundamental source of power in strategy. Yeah, trying to do too many different things is defocusing.

• 25:18Lenny Rachitsky?

  I think there's a, this quote in your book that I think is, and this may be paraphrasing. Each time you say yes, you risk turning a nascent good strategy into a bad strategy.

• 25:27Speaker 00

  Yes, focus is, when I was nine years old, I was at summer camp. And I had my parents sent me a magnifying glass and I was out there using the sun to try to cook a piece of wood. And I think I had a piece of cloth that I was trying to burn. Wasn't having much luck. And the magnifying glass focuses the sun rays, sun's rays on the spot. Counselor came over and he, he said, try this. And he pulled out a black thread from his T-shirt, put it down. And I focused the sun rays hard, cocked out.

• 26:12Speaker 00

  So stupid little story, but.

• 26:18Speaker 00

  Burn that black thread, there has to be a source of power. A cell.

• 26:24Speaker 00

  There has to be a focus.

• 26:28Speaker 00

  That's the magnifying glass. Focus the power. And it has to be on a target that can be affected. It has to be a black thread, not a white thread.

• 26:39Speaker 00

  And that sequence is part of strategic action. You need a source of power.

• 26:49Speaker 00

  I say power, I don't say advantage, efficiency, I say power because there are different ways in which power is exhibited. And you have to focus the power on a target that can actually be affected or achieved.

• 27:09Speaker 00

  And this is real simple logic, but it's a discipline to focus power

• 27:18Speaker 00

  on a target that you can affect.

• 27:23Speaker 00

  To take American power and say, we're we're going to change China's trajectory and Russia's trajectory and our own and, you know, and then name all the 30 countries around the world that we're trying to we're diffusing our efforts because they're not the same. They're going in different directions. Obvious when you say it, not so obvious as you live it because like any organization, like any big organization, US government has different interests, they're pursuing different interests funded for different purposes with different clientele. And so there's gradually a diffusion of effort.

• 28:06Speaker 00

  And one of the big issues in strategy is simply the organization. It complex organizations particularly have a, you have a hard time focusing energy because of all the different interests.

• 28:20Lenny Rachitsky?

  Yeah, I actually want to talk about both those things, so I'm glad that you teed them up. Let's talk about power. What is this idea of power? And how does that play into strategy? Why is it so important? And then what are some examples of power that people can think about when they're trying to think about implementing and adding a power to their strategy?

• 28:40Speaker 00

  Well, in a competitive situation, the fundamental aspect of power is something that's going to give you some sort of advantage. Usually it's an asymmetry of some kind. If two fighters are equally balanced, or two horses are equally fast, or two armies are equally, and they meet in competition, it's fifty-fifty. Who knows what will happen? For a strategy, you need to exploit an asymmetry of some kind. You're a little faster, they're a little... Something has to be

• 29:25Speaker 00

  different between the two things. So that's the beginning of power, is asymmetry. We can think of it as leverage. Sometimes being first is a source of power. Being first to recognize something can be a source of power. Having a reputation of a certain kind gives you some power that someone who doesn't have that reputation doesn't have. On the other hand, having a well-established reputation of a certain type can be the opposite of power because people don't expect you to be able to do something new.

• 30:09Speaker 00

  They expect you to be able to do this, but not that. Having relationships can be a source of power. When Gerschner took over IBM as it was failing in the face of the microprotection revolution, he recognized that their primary asset, their source of power, was that they were respected and they had they had upturn into every large corporation plan. No ifs.

• 30:44Speaker 00

  And as an actual producing company.

• 30:48Speaker 00

  And so he said, we're going to embrace our customers. Bear hung out costumes, you're going to serve our customers.

• 30:57Speaker 00

  Cause, cause that's our source of our power.

• 31:01Speaker 00

  That's our leverage. That's the ascension. Now, the world begins to change. And computing begins to move to the cloud.

• 31:12Speaker 00

  And IBM's customers, the largest companies in the world are the most hesitant to do that. Cause they've got the big IT departments that don't want to move to cloud. And so small companies move to cloud.

• 31:29Speaker 00

  And the big companies are, well, I'd say insecure in the cloud. We'd have to lay all people and we have these big machines we like to run.

• 31:38Speaker 00

  And so IBM then becomes disadvantaged in the new world because

• 31:47Speaker 00

  it inherits this big company orientation. And that lighting behind. So, so power, the opposite side of power is this what you inherit from the pen is can be the wrong thing.

• 32:04Speaker 00

  And so, but the source of power is, is that source of power can be an invention. The source of power can be a particular customer base that, that you have identified. It doesn't last forever, power. But, but all the different sources of advantage that are sometimes transitory and sometimes permanent are, are sources of power that, that a company has to use to compete and survive.

• 32:35Lenny Rachitsky?

  Imagine people listening are just like, oh, man, I gotta figure out the power that the advantage that I have with my business. Is there any advice you could share about helping people figure out where their power might lie?

• 32:45Speaker 00

  Oh, that's a good question, Lenny. So how do you figure it out? So I start, as I said earlier, with the symmetry. And what way is my company different than other companies? What way is my team different? What do we know that other people don't know? What do we possess that other people don't possess? So there has to be some symmetry to create competitive power. There has to be something different. So sometimes you have to redefine your space down small enough that you can actually see it. Particularly a smaller company that doesn't have worldwide power.

• 33:28Speaker 00

  Has power in a certain marketplace or shipment set of customers. Or sometimes it's not customers. Sometimes the power isn't who you can bring in, hire. So if you invented ChatGPT, you can bring in the smartest AI people for a year or two.

• 33:49Speaker 00

  Because everybody want, whole of smart AI people want to work at the cutting edge with the current winner. Then they'll start arguing each other and in fight, and there'll be all sorts of embarrassing personnel things going on. And so what else can grab that position if it's not well managed? Business is exciting in that sense, that it's not stable. It's not, it's not just as it was when I was first studying. It is not just IBM and Sears and AT&T forever.

• 34:27Speaker 00

  There's a constant change in the guard.

• 34:30Lenny Rachitsky?

  For better or worse?

• 34:32Speaker 00

  For better, because if you look at government, there is no changing of the guard that gets saltified.

• 34:37Lenny Rachitsky?

  Makes sense. So in your book, you have this whole list of types of power. I'll just read them real quick. Leverage, proximate objectives, chain link systems, design, focus, growth, advantages, dynamics, inertia, entropy. There's also the book, obviously, the seven powers that a lot of people are aware of. I guess, how do you think about just like the spectrum of types of power you can have? Is it, is it, is this it? Are there others?

• 35:02Speaker 00

  Yeah, I started to make a list there in the book and I wrote a bit about chain link systems and

• 35:10Speaker 00

  today, I mean, the power that, that, that new business models are exploiting is the power of the user base. What we called years ago, network effects, where the more users you have, uh, the more useful a product is. So the, the idea of network effects first arose with the telephone system, which the idea was

• 35:36Speaker 00

  that you don't want to be connected to a telephone system that only connects to, to a, it's not all that useful. You gotta connect to the work to be useful. And my, my colleague, Marvin Lieberman, was taking the economics course at, at Harvard University at the same time that Bill Gates was a student in that classroom, professors going on a network effects. And of course, that's what catapulted him and his software, MS-DOS at the time, not MS-DOS, he had something called Basic, that the network effect was huge. He got angry about the network effect because he could go in painting, they could stealing

• 36:19Speaker 00

  it and using it to pretty soon everybody in the microcomputer industry had M-Basic.

• 36:27Speaker 00

  Then we get the network effects from not just software, but user bases now with the internet. And so you get network effects with big social media. No one wants to be on a social medium. Only three other people are in. So you get having a large network. Amazon can get big fast because the old, the economics are amazing. So we used to say, well, in a department store, economics are that you're, you're saving people the cost of going out of the store, moving downstream to another store.

• 37:10Speaker 00

  But now it's all in one place. And supermarkets, the same thing. But they had a little bit of a thing like Amazon where there are the ease of shopping on Amazon keeps people from leaving it and going to another website. Now, other websites have gotten better and better and some of that is less strong than it used to be. And this is constant struggle with it. Nevertheless, the size of the user base there is an important source of symmetry of power for the people who've come out ahead and won that battle for this round, this five years, 10 years. How long does it last before some other thing begins to take precedence?

• 37:53Speaker 00

  And now we have two side markets, whether it's credit cards or, or places where both buyers and sellers get together. And so here, these big forces that companies are playing with right now are these network effects. And when the new generative AI, we have the possibility of stronger effects than we've ever seen before. But we don't know yet. But the suspicion is that size is going to matter, that the size of the data that you could put into the learning algorithm is going to make your AI better.

• 38:41Speaker 00

  And so again, a big is gonna matter. Just think of Google and their ability to improve search based upon all the searches that go on on their base every day. It's very hard for Bing to catch up because Bing doesn't have as much data to train on. And so unless there's some new innovation there that isn't just the amount of data.

• 39:12Speaker 00

  The leader again has this asymmetry working. Now, the way you get around all that is by being specialized by by only a particular approach. That isn't the market leader's approach and it's always been that way in business. But you know, our attention is often attracted by giants. So yeah, sources of power. Today, when we look at business models that are part of the fabric are these network effects. And things like that that are very, very strong. And people are trying to get those in startups and in small firms.

• 39:54Speaker 00

  Within a certain market space and build it as best as possible to get ahead of others. There's been venture capital available to to try those experiments. And some of them work and some of them don't, but that's that's this new age we're in now. Where the speed of building a market position with network effects is is a dominant game in the tech space.

• 40:25Lenny Rachitsky?

  I feel like Twitter is the ultimate example of the power of network effects, especially recently, where if you think about it. Everything about Twitter has changed. And it still continues to run like he laid off 80% of people at the company. They changed the name, they changed the domain, basically. The algorithms changed like what is I don't know what is still the same.

• 40:44Speaker 00

  How can you lay off any of the people that it it still runs? I mean, you gotta wonder.

• 40:49Lenny Rachitsky?

  I I love Twitter. I'm on there all the time. I feel like it's never been better, which is kind of wild.

• 40:54Speaker 00

  Twitter is fascinating. I mean, I I tune into it every couple of days and see what's going on.

• 41:01Speaker 00

  It is just an amazing rumble of opinions and statements. It's much more interesting than it was five years ago.

• 41:11Lenny Rachitsky?

  There's a lot of diagnosing and not a lot of concrete actions. But anyway, I wanted to come back to the element about power. I think when people are thinking about power, it may not be clear where that plugs into the diagnosis, the guiding policy and the coherent actions. Where should you be thinking and implementing this idea of where my power is when you're playing out your strategy?

• 41:35Speaker 00

  To undertake a strategy that you think will work, you've got to have a reason that it makes sense.

• 41:48Speaker 00

  And that that reason is derived from some source of power, some source for debate. Ultimately, your power or your advantage is something based in history that has the feel of reputation or institutional skill.

• 42:16Speaker 00

  Or it's some kind of asymmetry or knowledge that you have that others don't have. So it's a resource that you can use

• 42:32Speaker 00

  that your competitors or others don't have equal access to. Because you've either have mastered it or you own it or inherited from the past.

• 42:45Speaker 00

  All those things are sources of the power that you've used to make it not an even bet. So when you walk into a casino.

• 42:59Speaker 00

  There's, there's, well, maybe if you play poker with skill, you can expect to make some money, but the general casino games, you're going to expect to lose. And in business, statistically, if you come to me and you say, I'm going to open a new restaurant, what should my strategy be? My answer would be, don't open a restaurant. Invest in the S and P 500, because the statistics are that new restaurants fail. So what makes you think that you can succeed? Oh, I really want to succeed. Not good enough.

• 43:42Speaker 00

  I trained under a chef who's been very successful. Oh, that's interesting, Tony Moore. Uh, so there, there. Where's the symmetry here? Where's the source of power that where you go from the odds, the standard odds in this game are against people? Where you think the odds are in your favor? Uh, and that's, that's the source of power looking for. We're looking for this, this information, this skill, this, this thing in the field, the way the resources are arranged that's going to get you this edge.

• 44:24Speaker 00

  And some of that is, is sort of part of the situation and some of it's how you, how you shape and focus your actions. Strategy tends to be surprising when we see it, when we see it work. And surprising because we don't expect it. We expect people to bumble around. We expect Arby's to bumble around. We expect nation states to bumble around. We don't expect them to execute coherent strategies. The United States went to Afghanistan.

• 45:00Speaker 00

  And it wanted to catch Osama bin Laden, but at the same time, they didn't want to put an army in the field to actually catch him because it would be embarrassing to have that many Americans in the field. That's what happened in Tora Mora. The Secretary of Defense said, no, we don't want to make it look like we're taking over the country. They didn't try to catch him as hard as they could. And we want to have the education of women, and we want to have the democracy, and we want to have a long list that would have no opium production. But at the same time, our allies are the opium producers. It was the Taliban that got rid of opium. Americans couldn't do it. So we had all these

• 45:45Speaker 00

  different objectives. And it doesn't work. You need to have a focus on something achievable. What's achievable? Nation building is hard stuff. Takes a century. You know, Afghanistan, I'm often a tangent here with Afghanistan, but it's a really interesting subject. Afghanistan was a warlord society. A bunch of different warlords running the place. Well, what's

• 46:25Speaker 00

  a warlord society? Where else do we look? For an ounce? Well, in the good scabble in 1650. You look at France in 1300. You look at Japan before the modern era. These are warlord societies. Well, how did they go from that to being a coherent government? That maybe wasn't democratic, but still, there was a government instead of just a much war. It took some to conquer all the rest. And then it took a long time for them to put in the structures of government. And then maybe it became a democracy, maybe not.

• 47:10Speaker 00

  But that's the process. It's not like you just go in there and say, you're now no longer a warlord society because we've decreed it. Call them.

• 47:22Speaker 00

  I don't know. You're gonna ask me more questions about what it is people should know and how do you get these sources of power, how do you get these insights? I'm a big fan of history. I'm a big fan of knowing things about what happened. Business history, biographies, world history. And if you don't have access to other times and other places and other things that have happened, it's very hard to think strategically about the situation you're in. Because there isn't a science of strategy. It's not like physics. It's not like engineering where we can write down the equations of stress on a beam and say, how thick does the beam have to be?

• 48:06Speaker 00

  It's not like that. It's, a lot of it is based on analogy to previous human experience.

• 48:16Lenny Rachitsky?

  That is an amazing insight. Is there anything you find most rich and valuable in terms of history, periods, empires, stories that you find most connects? And as an analogy, is it like, is there anything you find consistently is useful? Or is it just read as much as you can and you'll often find something in there?

• 48:35Speaker 00

  Yeah, the, the, the, the further back we go in history, the, the leaner is, is less rich. The best histories are, are, are written by the people at the moment it's happening. Or very soon after. You know, history books and things like that are someone's opinion. Uh, but, but you know, like our own history here in the United States. And we have pretty good documentation about what went on in the Indian War. Why we had these big, uh, cycles of economic growth and then depression. We had depressions in 1840 and then in 18,

• 49:19Speaker 00

  after the Civil War, and there was another huge panic depression in 1890s. Uh, a lot of people don't even know that these things happened. How did they happen? And, and of course, everybody knows about the Great Depression, 1929, 30s. But go back and ask, how did that happen? When did that happen? And you'll hear professors opine about why it happened. But there's no agreement. The biggest economic fact of the last 150 years, you don't know why it happened.

• 49:58Speaker 00

  Go back and, and then you can go online and look at the Wall Street Journal, the New York Times from that era and start in September of 1928. And just look at the front page every day, which I don't. And you can see it unfold.

• 50:18Speaker 00

  And it's a surprise, definitely. There goes, well, Ford just laid off some people, but it's temporary, they'll hire them back. This economist says, well, it's a temporary business, it'll come back. And, and it gradually gets worse and worse and worse. And there's no understanding of it.

• 50:40Speaker 00

  There's not a lot of analysis.

• 50:45Speaker 00

  And so you got none treatment saying, oh, it's monetary. They didn't loosen up the money supply. You got other people saying things. But, but put yourself back at that moment in time and see what people saw and realize that no one understood what was happening.

• 51:05Speaker 00

  And to form your own opinions.

• 51:09Speaker 00

  That's the, that's the diagnosis skill or that's a, that's the feeling.

• 51:15Speaker 00

  Now, what depends. You fall off a boat.

• 51:21Speaker 00

  You're on a cruise ship and you fall. And you're, you're now in the ocean.

• 51:27Speaker 00

  It's terrible and it's confusing. And there's waves and there's water and you're, I don't want to drown. And you look around and you see up here's a floating piece of wood. Let me grab it. Wow, that feels a lot better. That's how it feels when you look at a confusing situation.

• 51:48Speaker 00

  And the first idea of how to understand it comes to mind.

• 51:53Speaker 00

  Oh yeah, I've got this piece of wood. Now I'm not drowning.

• 51:59Speaker 00

  But is it right?

• 52:04Speaker 00

  The most important intellectual tool we have is to think again.

• 52:12Speaker 00

  To, to say, okay, I, I came up with this diagnosis because I thought this and I thought this. Is there another way to look at the situation?

• 52:23Speaker 00

  Is there a bigger piece of wood over there than I can ramble to? That's the hard thing. When I looked at the Great Depression, I, what I saw is the whole of it. So if you look at capital goods, all capital, most capital goods that the public buys, the adoption curve goes up like this, it peaks, and it declines, and then it comes back up again. Because it comes to a point where everybody who can afford one has got one. And then the new sales drop off.

• 53:01Speaker 00

  And my mind, that's what I saw. 1929, everybody could afford a car, had a car. And the auto industry began, the first signs of the Great Depression were in the auto industry. So that was my plank that I grabbed. Now, I don't see anybody else writing about that.

• 53:21Speaker 00

  But that's, that's the exercise and, and to, to exercise your mind about trying to understand complex situations, it's best to go back. You don't have to correct the Great Depression, but you can go and try and find situations that other people had to deal with and, and look at as much data as you can and, and to practice that. That's what education should be in a business school. It's not, they teach theories now, because it's so much easier to teach a theory than intellectual structure.

• 53:58Lenny Rachitsky?

  It's also a lot more work, reading a lot of books and history and studying and thinking.

• 54:04Speaker 00

  I had a colleague at UCLA who assigned a book to MBA students and they went to the dean and kicked out of the course. A book, he wants to read a book.

• 54:16Lenny Rachitsky?

  Oh, man.

• 54:18Lenny Rachitsky?

  It sounds like you have another book in you writing about the Great Depression and what really happened there.

• 54:22Speaker 00

  Uh, maybe.

• 54:23Lenny Rachitsky?

  Oh, man. Exciting.

• 54:26Lenny Rachitsky?

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• 55:10Lenny Rachitsky?

  For a limited time, Lenny's podcast listeners get $1,000 off Vanta. Go to vanta.com/Lenny, that's V-A-N-T-A dot com slash Lenny, to learn more and to claim your discounts. Get started today. I wanted to zoom back in on something very tactical. So say you're a product manager listening to this that is thinking about writing or has to write a strategy for their team. Say it's like they're working on the onboarding experience of their product and they're about to sit down and start to write out the strategy for their team. And say they have like a general idea of what they want to do. Do you have any advice for just like how to lay out a strategy? As you talk, I think of there's a section diagnosis, a section guiding principles, a section actions, and then there's power in there in the guiding policy.

• 55:55Speaker 00

  Right.

• 55:55Lenny Rachitsky?

  Is that how you laid out? Do you have any advice for how to write this out?

• 55:59Speaker 00

  So I wrote the crux because I felt that that kernel was not sufficiently sharp enough for people. And even in the crux, I could, if I could rewrite the crux book, I would maybe write it a little differently today.

• 56:20Speaker 00

  A whole couple of things I would, I would change. First, it's really important to understand the challenge, the problem. Diagnosis is not merely understanding the world. It's understanding the challenge you face. What makes it hard? So the question I ask client is exactly that. What makes it hard? Client will tell me, oh, we want to open up business in Australia. It's a market we haven't had. And I'll say, okay, so why are you and I talking about that? You're the CEO.

• 57:04Speaker 00

  Just tell somebody to do it. What makes it hard? Oh, well, we don't know anybody in Australia and they kicked us out. If he'll tell me, if you push, he'll tell you why it's hard. But that understanding hasn't been percolated into a strategy. Part of the problem is that the concept of strategy has been so beaten up by thousands, hundreds of books and thousands of web sites that people have a hard time trying to figure out how to create a strategy

• 57:49Speaker 00

  because they're drawn up, down, left, right. So my two pieces of advice, anybody that's actually trying to do this is A, state the problem. And B, don't call it a strategy. Call it an action agenda. That you're not creating a strategy. You're creating an action agenda. What are we going to do about this problem? That's the essence of what you're doing when you're thinking strategically. You're recognizing the problem and you have an action agenda to deal with.

• 58:34Speaker 00

  It's not five years out, 10 years out. It's not your general mission to build a better world. It's none of that. All of that is a different narrative form.

• 58:49Speaker 00

  Because it's huge numbers of people out there willing to sell you advice on how to mission and your vision and your values and your all these things that have to be in place before you can have a strategy. And that's not true.

• 59:09Speaker 00

  It's a different model.

• 59:13Speaker 00

  I start now with ambitions because people want to put ambitions in place. They get angry with me. I don't allow them to talk about their ambitions. So we start with ambitions. And, okay, you have all these ambitions. And I write in the crux that when I was 25, I wanted to be a top business school professor. I wanted to be on Fortune Directors. I wanted to drive a Morgan Drophead Plus 4. I wanted to climb the Great Mountains of the world. I wanted to learn to fly an aircraft. I wanted to marry a beautiful woman and have successful children.

• 59:55Speaker 00

  I wanted to have a townhouse on the Yule Samba in Paris. And all of them. I have a lot of ambitions.

• 1:00:05Speaker 00

  That's our strategy.

• 1:00:08Speaker 00

  We all have ambitions and every company should have ambitions. If we look at all those ambitions and let's say I'm 25 years old. Well, what's keeping me from reaching them all?

• 1:00:23Speaker 00

  Well,

• 1:00:25Speaker 00

  I'm not ready to join Fortune Directors. I'm not experienced enough. Oh, okay, so I put that over here. I can't afford the ten. I'll cut it over here. How about the ambitions that you have any chance of making progress on now?

• 1:00:44Speaker 00

  Well, beautiful woman, yeah, I don't know any women, but maybe I'll meet a few. I hope we can do something about that. So, which of your ambitions can you begin to make progress towards reaching?

• 1:01:02Speaker 00

  And what's holding you back? What are the barriers? What are the problems? I approach the question of the problem now through the filter of the ambition. That these ambitions, fine, let's accept them all. And which one can you actually make some progress on today? And what's making that hard? What are the challenges?

• 1:01:27Speaker 00

  So you're choosing a challenge. You're choosing of the possible challenges you could face up to. You can't do them all. So there's a focus thing. You're choosing which challenge to focus on, and that challenge has to be, A, important,

• 1:01:45Speaker 00

  and B, it has to be achievable. It has to be something that you can address. It has to be an addressable challenge.

• 1:01:53Speaker 00

  And so the search for an action agenda, not calling it a strategy, is this balance between problems that are important because they're close to your ambition, and problems that you can actually address and do something about.

• 1:02:14Speaker 00

  And that overlap then becomes the choice you make. Okay, we're gonna, we're gonna go after this. And here's the action steps we're gonna take to do that.

• 1:02:26Speaker 00

  And if it's a big company, the action steps may extend over two to three years. A smaller company, it could be like six months, three years. These are things we're gonna do, not goals we're gonna achieve. These are things we're going to do, action steps.

• 1:02:42Speaker 00

  That's that's sort of the way I put it together today, which is slightly different than the way it's put together in the crux.

• 1:02:48Lenny Rachitsky?

  Yeah, I love this advice. That's such a simpler way of thinking about strategy. It's an action agenda. Here's the things we're actually going to do. And then it starts with the challenge. And just to talk about the crux briefly, the crux is named after this concept in mountain climbing of the hardest point of the mountain climb, where people, if they get past that, it's all downhill. And I think basically the point there is focus on the most challenging, like the biggest challenge that you need to overcome to achieve these ambitions you're describing is is that roughly the way to think about it?

• 1:03:20Speaker 00

  Yeah, yeah. And the idea comes from a design.

• 1:03:26Speaker 00

  And it comes from climbing because I used to be a climber, a rock climber,

• 1:03:33Speaker 00

  and a snow climber. And a crux and a climb is the hardest part. The hardest pitch or a pitch, the hardest move is the crux of that piece. And then the basic advice to a climber is if you can't do the crux, don't do the climb because you're going to fall off there. Now, that's not exactly true because you can try over and over again till you get it. But in general, particularly if you're looking at an uphill climb, you better not take it on a climb where you can't handle the crux. That's why people go boulder it. The builder's still up to him.

• 1:04:11Speaker 00

  And so that's, that's what the concept of the crux comes from. Now, in in business, the crux is the hardest part of climbing. And from the design point of view, one of the skilled designers, whether they're an engineer or an architect or someone else, there's there's usually a challenge.

• 1:04:37Speaker 00

  Iain Pei was hired to take a look at the Louvre in Paris. And they had a dusty parking lot in the center of this giant palace that had become a museum. And they wanted an entrance to Louvre there. And the problem is, is they didn't want, he didn't want, and they didn't want like the new building that would obscure the Louvre, because the Louvre itself, the building itself is part of the storage, it's part of the scene. And yet, at the same time, they needed to have an entrance, because the entrance at

• 1:05:19Speaker 00

  that time was all from the sidewalk. And you looked at the situation and the competing needs and the problems. And you had an insight into, well, build a transparent building, build a building out of glass, so that you see through it, the Louvre doesn't obscure. And of course, you can build a rectangular building out of glass, the top will get dirt, so it'll be a little, show me enough glass.

• 1:05:59Speaker 00

  That design insight is something that software engineers, hardware engineers, mechanical engineers, space science engineers like I was, experienced. When we look at the dilemma, and we try to focus on what makes this hard, and then, by focusing on the difficulty, we see a way around it.

• 1:06:30Speaker 00

  Elon Musk focused on, "Well, why is it so hard to use a rocket? And it's so hard because as it comes back into the planet at 18,000 miles an hour, it burns up in the atmosphere, or we have to spend a lot of money on heat shields." And at some instant, he said to himself, "Well, why not, like science fiction, just turn it around and have it land on its rocket? Oh, it's not enough fuel. Well, why don't we carry more fuel?" So SpaceX was designing... I was a conceptual designer of a machine that became Voyager, and went out past the

• 1:07:15Speaker 00

  planets into interstellar space where it's floating around right now. Well, one of the problems is, how do you know where Jupiter is? It's right there. Okay, but how do you know where it is, plus or minus 100 miles? How do you know exactly where it is? When we sent a mission to Mars, we were off by 500 miles. So Jupiter, how do we know exactly where it is? Because we can look at it through our telescopes, or we can look at it from the right side of our orbit and the other side of our orbit, but still, there's a couple thousand miles error in that.

• 1:07:58Speaker 00

  That's too much. And then, studying that problem, the simple solution suddenly flashed, and I wish I could claim it was mine, it wasn't, which is, oh, take a picture of it once we're halfway there. Send that picture back, and we'll see it against the distant stars, and now we'll have a triangulation, they know where it is. So designers experience this sense of focusing on the crux of the problem, the hard part, and then seeing a way through. And that's strategy.

• 1:08:39Speaker 00

  Strategy isn't picking a strategy out of a list of common strategies. It's looking at the problem. What makes that problem hard? And seeing a way to solve it.

• 1:08:54Speaker 00

  Now it's called insight and insight is scary. It's scary because it's not guaranteed to happen. We want to innovate, but we're scared of insight. We want to be the first, but we'd like to pick our strategy off a list of common strategies for being first. We want to beat the market, but we don't want to study enough to have an insight. So insight is critical. Insight is not magical. It comes from immersing yourself in the nature of the problem and you will have at some point an insight about how to deal with it.

• 1:09:37Speaker 00

  It doesn't always come when we want it to. It can come while you're driving the car, it can come the next day, it could come in the show. Charles Dorby reports that his insight into the nature of revolution came as he stepped off a carriage into the village trading somewhere. So suddenly he said, oh yeah, I thought somebody is. It's like how we raise owls. We read the, read the strongest. Sure. Why was that so hard for me to see?

• 1:10:14Lenny Rachitsky?

  So I think one of the big takeaways here is that if you want to get better at strategy or be more successful with how you think about strategy, spend a lot more time on diagnosing the problem and finding the biggest challenge that is keeping you from what you're trying to achieve. And your insight might come the more immersed.

• 1:10:30Speaker 00

  And call it an action agenda. Here's what we're going to do. Not, here's all the things we wish would happen.

• 1:10:38Lenny Rachitsky?

  I love it. You mentioned this point that some of the biggest challenges to executing a strategy is organizational dynamics and politics is a part of that. Is there anything you could share for folks to help them through that? You talked about one of the biggest challenges, people just want to keep adding more priorities. There's all these needs, everyone wants to include their thing in the strategy. Is there anything people can do to improve how this works?

• 1:11:04Speaker 00

  Typically, I'll say typically we need hierarchy of power.

• 1:11:10Speaker 00

  Because there has to be some mechanism for deciding what we're gonna do. And there's people with different interests and different private interests and public interests. And somehow, there has to be a choice about putting some of these aside and doing this. That you can't say, "Our strategy is to do everything that everybody wants to do." That's what happens when you form a committee in a city and you say, "What's our city strategy?" Yeah, they say, "Oh, we're gonna paint park benches, we're gonna clean up the grass, we're gonna build a new this, we're gonna..." They have a lot of that stuff, everything they're gonna do with that. And anybody who raised their hand and says, "Well, what about the burnage?

• 1:11:55Speaker 00

  Can we, you know, oh, yeah, let's put that in too." That doesn't go anywhere. So, we, inside organizations, people have different opinions, so that's part of it. They have interests that they may not state clearly. I interviewed Secretary of Defense Donald Rumsfeld while we were invading Iraq second time.

• 1:12:33Speaker 00

  And I was actually interviewing him about budget matters, but he asked me, "Well, what do you do, professor?" He didn't, I said, "Well, I do strategy." And he said, "Well, strategy, that's a hard subject." He said, "You know, I've got people here in the Defense Department who have an expert on anything. You wanna know the clan structure in Iraq? We've got people that know. You wanna know the weather? We've got people that know. You wanna know how many sorties we can fly in 24 hours? People will know. I got any, anything you wanna know, we've got someone who knows about it." But they all disagree.

• 1:13:14Speaker 00

  And each have their own private agenda. They have a contract they want to get. They have a company they want to support. They have a conceptual idea they want to push. So every little bit of information comes with an agenda. Sometimes obvious, sometimes didn't. And how do you put all this stuff together to come up with a strategy? It's, do you academics have a solution to this? And I said, no, we don't. We don't know much more than, you know, what you would two, three thousand years ago, where you should put five to eight smart people in a room and you tell them to come up with something.

• 1:13:56Speaker 00

  But his question is at the heart of what I call a founder, which is how do you get a group of people to coalesce around an action agenda? And what process would you go? How do you do that? So it's a different question than what should our strategy be? The question is, well, how should you go about creating a strategy? Should you ask the product manager right at town? Or should you ask the CEO to come up with it? Should you hire a consultant? How do you, where do you, how do you do this?

• 1:14:34Speaker 00

  My experience working with companies is that the senior executives have to do this. And my experience is that the senior executives know pretty much everything you need to know to do this. That you don't need, you know, consulting firms to come in and analyze everything and to do. Yes, you'll gain some insight if they come in and do a competitive analysis and a customer analysis and all of that. But the basic issues, the challenges you're facing, they know that. It's not mysterious. They know all that stuff.

• 1:15:16Speaker 00

  But they disagree about the importance of different things. And more importantly, they occupy positions of power that if we go this way, this is going to be hurt. And if we go this way, there will be more money for that. And so they're not, their interests are not aligned.

• 1:15:42Speaker 00

  Which is part of what Phil was referring to. And so that the problem of strategy inside an organization is diversity of interest and fear of action. Because action, when you do something in an organization of any size, it involves people changing what they do. It involves changing power relationships among humans in some way. That someone who's been the alpha maybe is not the alpha anymore. Someone else is the alpha. This is, this is heavy stuff. And this is why

• 1:16:24Speaker 00

  we have a hierarchy, because someone in the end has to say, it's going to be this way. And that's, people are hesitant to do that. CEOs are hesitant to do that, more so today than when I was a young man. It's, it's become hard for people to do this. If you go to the bookstore and look at the management section in the bookstore, most of it's about leadership. And the leadership is mostly about perfecting yourself. It's not about leading anybody. The, the theory is that if you perfect yourself and somehow raise from the top of your head,

• 1:17:09Speaker 00

  and people will follow you because you're so magnetic and you're so perfect and you're so wonderful and you're so insightful at that. People will, oh, you won't ever have to say, "Vigess, do that." It's so embarrassing to tell somebody what to do. And so this is the world we sit in today, where one of the problems in doing strategy is that it's somehow been displaced by this literary form about mission. And, and management is being displaced by leadership, which is the idea that the leader

• 1:17:47Speaker 00

  Has a vision and people, it happened in the eighties, there's a whole literature there about transformational leadership that has percolated through the system. And those, I'm not against leadership, but you have to tell people at some point, we're going to do this and we're going to do it this way and Bob's going to be in charge of this aspect and Joan's going to be in charge of that aspect. And there's a hesitancy to do, to make those choices because that's part of the action agenda.

• 1:18:21Lenny Rachitsky?

  So the takeaway there is essentially have a decider. It makes me think of actually of George Bush. You talked about Rom's Phil, but George Bush's famous quote, "I'm the decider." I don't know if you remember that.

• 1:18:32Speaker 00

  Yeah, that's true. One of the things we see in government particularly is presidents have a hard time getting advice because they, they surround themselves with people who won't please them, number one. We rarely, you know, it used to be, I remember during Woodrow Wilson's administration when he decided to take some hard action, the instantaneous, like, can he have to do something vis a vis Germany? And the Secretary of State disagreed and quick, bang, that was it, quick. I disagree. Up. Don't see that so much anymore.

• 1:19:12Speaker 00

  All the people, organizations get frozen because of the difficulty of changing positions of interest and power inside.

• 1:19:29Lenny Rachitsky?

  Humans are complicated.

• 1:19:31Speaker 00

  Well, if you look at Nokia, you know, one of the big examples of a strategic error was Nokia was the leading smart phone maker in the world. And then somehow it lost it to building to compete. And, you know, interesting question, it's been a fair amount of research on this is how did that happen? One way it happened was they replaced the engineers who used to run the company with lawyers and accountants. Nothing wrong with lawyers and accountants, but they, they didn't have a feel for this hardware, software set of issues.

• 1:20:12Speaker 00

  And another was they they put in a matrix organization that so diffused power inside the organization that nobody was actually in charge of anything in particular. I'm exaggerating, but you know, the CEO kept pounding the desk and saying, you know, Apple's coming out with a smart phone, you have a touchscreen and somebody here should make one of those. There was no one in authority to do such.

• 1:20:40Lenny Rachitsky?

  Maybe a final question on the other end of the spectrum from an Nokia, from a startup founder's perspective. What is a strategy and what should a strategy look like? If you're just a founder, pre-product market fit, just trying to figure out where you want to go, what should a strategy look like there? Do you even need a strategy?

• 1:20:56Speaker 00

  Well, it's it's you're you're dealing with a lot of uncertainty. When you're a founder and a startup, you're making a bet. You're making a bet like a well, well, wildcat would say, I bet there's oil under this ground and we're going to drill, we're going to find it. There's a certain amount of bet that's going on. And you should be clear about the nature of the bet. The the reality is going to be revealed to you in bits and pieces as time passes, whether a certain approach is going to work or not. What we find doing research on startups, Silicon Valley startups, is they start out

• 1:21:40Speaker 00

  typically aiming at a particular product market solution. You know, and the idea that you have in your head is there's a set of customers who want A, would like to have A or being denied A, but we have a way of giving them A, something, product or service. Now, some people, they aren't that even advanced. They basically say, I know how to make something and I'm going to try to sell. You know, last trap. But if you if you're, if you have any chance of succeeding, you haven't since you have a target market and you have a solution to the target market's problem and buy it. And now you're going to, you're going to go after it.

• 1:22:23Speaker 00

  And the research that we have done on the startups is that generally it does well.

• 1:22:33Speaker 00

  But the ones that survive and prosper switch. They say, well, it isn't that customer, it's a different customer. You're walking that customer. Oh, and that customer wants a slightly different product. And they, they switch over a period of a year or two, three years. Back, back, until something begins to click and then begin to grow and begin to add functions and assets. So there's a search. There's a search like a truffle house, searching with a truffle that's going on. And you've got to be, I think, you've got to be of two minds. Like so many things in business, when you're doing this, you've got to be of two minds.

• 1:23:14Speaker 00

  You've got to be convinced of the certainty that you're going to win. And you've got to be willing to shift when things aren't working. And that's, that's, that's a double jointed exercise that some people can do and some people can't. It's also a human skill to, to both commit and to be willing to move. But it's a bet. You should be clear in your own mind about the nature of the situation, the technology that you're, you're betting on. Oh, now sometimes it's evolving so fast, like generative AI is right now, that you

• 1:23:59Speaker 00

  can't be sure. That you're going to take a position where you think things are going to be in a year. And that's very, very entrepreneurial, very edgy stuff. But it's not. Go back and read about the beginnings of the electrical industry or the beginnings of aviation or beginnings of motorized, this beginnings of cars. I mean, people had to bet about what this industry would look like. The first cars were electric cars.

• 1:24:41Speaker 00

  The first cars sold in quantity in the United States were electric delivery vehicles used downtown in cities. Delivery trucks were in progress. They were like Renault batteries. That was the bet.

• 1:24:56Speaker 00

  All that changed with the First World War. The United States built thousands and thousands of gasoline-powered trucks to go to Europe, rustle through the mud. And people came back knowing how to fix those engines. And those trucks got sold off as wholesale to farmers. He gives them all here. Feels that we had the gasoline to take off like a rocket. So you cannot predict the future. There's an Arab saying that I like that says, he who forecasts the future lies even if he tells the truth. We're making bets. That's what business is. We're making a bet.

• 1:25:37Speaker 00

  And if we're a rich company, we can make a bet and afford to be wrong. But if we're a startup, we have to be fast. We have to, we have to adapt as, as the information comes in. And that's the nature of the story. The action agenda has to be quick adaptation to, to, to changing conditions.

• 1:26:06Lenny Rachitsky?

  I feel like you have another book here where you could adapt a lot of this wisdom to startups. I'm looking at my notes from when we were talking about earlier. And you have this point of when you're trying to write out a, you call it an action agenda, not a strategy. You're basically on the hunt for a big problem and an important problem and an achievable problem. And that essentially you can boil that down to, that is the job of a founder, to find an important problem and achievable problem and then solve it for a lot of people.

• 1:26:32Speaker 00

  Yeah, yeah, I like that. I like the other exercise I used to take my students through was what I called value denying.

• 1:26:47Speaker 00

  Now, what is it that you should be able to buy, but you can't?

• 1:26:52Lenny Rachitsky?

  Hmm.

• 1:26:53Speaker 00

  You know, and at the time I taught this stuff, I was upset because I would lose my baggage on a nonstop flight from Los Angeles to Paris. So I'd like to buy baggage, sure. So I'd like to buy a seat. How do you get your baggage not to be lost? Now with with security systems in place, it's less less. Come on, I can I can I find someone to help me remodel my home? It's going to be on time and I'll butcher.

• 1:27:23Speaker 00

  Hmm, not available. Can't buy it in price.

• 1:27:28Speaker 00

  If I live in Hong Kong and I'm going to the airport, I can drop my luggage off downtown and it arrives at the airport check. I don't have to let it. Why can't I do that in the US? Um, value denied. And then engineering, you know, thinking about how something ought to be.

• 1:27:52Speaker 00

  You know, it's how Salesforce.com got started was, well, how should this be? It shouldn't be a computer. It should be a webpage.

• 1:28:04Speaker 00

  It should be like that was a, for it has books.

• 1:28:10Speaker 00

  And so that was the beginning of Salesforce.com. I asked a group of students once to think about the perfect window.

• 1:28:21Speaker 00

  This is physical, something we could think about in a classroom without doing a lot of research. Well, what the perfect window, oh, perfect window should be transparent. It should let the sun in. All right. So it's just let in the light, but not all the time. Sometimes you want to watch the toilet, so it should also darken. Well, drapes for for shades. Okay, it should let in the air. Good, but not the bugs. Oh, screen. It should let in the air, but not the noise. That's a little harder.

• 1:28:56Speaker 00

  Yeah, so you go down a list of things that a window should do. It should let in light, but not light. It should let in air, but not the noise. It should not let in everything we don't want. It should not let in the bugs. It should maybe have shutters or not shutters. And so I said, well, how could you design the perfect window? What would it look like? And there's some kids at MIT that had developed this thing that lets in air, but keeps out the noise. There's these little auto- automated filters. Keep out noises on certain frequencies. Well, we don't have a perfect one. But, you know, think about it. You know, windows could

• 1:29:36Speaker 00

  be better than they are. And that's a real simple device that we're all familiar. And look around you, look at everything you've got and say, well, how should it be? And there's opportunities there. Now, a lot of the times, the opportunities are blocked by the lack of certain materials, regulation. Regulators have decided that you can't sell a car in the United States unless it goes through a dealer. So that, that holds back innovation in that business. And so, plumbing, how should plumbing

• 1:30:19Speaker 00

  actually work? Well, there's a little search of rules about how plumbing works and electrical things work. You can't innovate there very easily because of the underwriters labs and the unions and a lot of the stuff that's done in home construction is there to create jobs, not to produce costs. So how do you get around that? Yes, you have to look at places where it's possible to innovate, first of all. But yeah, the idea of how do you make something better? How do you make it perfect? What would the perfect light switch look like? And so on. These are real simple, silly questions, but they lead to new, new businesses first, if you pursue them.

• 1:31:02Lenny Rachitsky?

  I love how full of startup ideas you are. I also think we came up at least two new books that you can write. I think you're gonna have a lot of work to do after this conversation. Final question, is there anything you want to leave listeners with or takeaway? Is there a final nugget you just want to share for folks?

• 1:31:19Speaker 00

  I want to show you that strategy is not mysterious. That I've spent my life studying strategy, pursuing it, consulting on it, writing about it. It's not mysterious. It's about solving problems. It's about solving the most important problem you're facing that you actually do something about. You don't have to be some two to come up with a strategy, but you need to be focused on something doable and be consistent about it. I have a long list of things not to do. There's a fourth book I'm thinking about writing called Don't Do That.

• 1:31:58Lenny Rachitsky?

  I would read that. I love that title.

• 1:32:00Speaker 00

  Can I tell you a story?

• 1:32:02Lenny Rachitsky?

  Yeah, absolutely.

• 1:32:03Speaker 00

  My wife Kate took up skiing when we got married 24, 25 years ago. And she had this stem that she couldn't get rid of. When you make a turn, you know, turn like that, you put the ski out and stuff. Right. Made her ski on one ski. I did all sorts of things to her back. She couldn't, she couldn't fix it. And finally, we signed up with a illustrious ski teacher in Aspen. Free day intense program guaranteed that she would lose her stem. She'd love. And so we went there.

• 1:32:47Speaker 00

  On the second day, I followed behind the instructor and her to see what was going on. And they had been through some exercises on day one, but on day two, they were focusing on this and she would put out her ski like that. And he yelled at her, he said, "Don't do that." And after a day of being yelled at, "Don't do that," she didn't do it anymore. She was fixed. So the secret technique that they had in this program for curing her stem was to yell at you and telling you, "Don't do that." And so I'm thinking about a book called Don't Do That. About a business thing where I'm not sure it makes sense, but you have to noodle these things for a while before they begin to gel.

• 1:33:33Lenny Rachitsky?

  Yeah, I love this idea. Reminds me, one of my friends is a therapist. And there's this video by Bob Newhart where he's a therapist. And someone comes to him and they've got all these problems like, I get really sad when I think about my mom and I have this chronic pain and his advice, just, just stop it. Just stop.

• 1:33:51Speaker 00

  Don't do that. Stop.

• 1:33:52Lenny Rachitsky?

  Quick, get Roger Martin. Just stop it. That's the advice.

• 1:33:55Speaker 00

  Yeah.

• 1:33:55Lenny Rachitsky?

  And so I feel like there's a lot of synergy there. All right. Well, with that, we reached our very exciting lightning round. Are you ready?

• 1:34:04Speaker 00

  I guess so.

• 1:34:07Lenny Rachitsky?

  First question, what are two or three books you've recommended most to other people? I feel like this is going to be a challenging question, but what comes to mind?

• 1:34:15Speaker 00

  Sort of is. Yeah. I mean, the books, I'm playing questions and stuff about the innovators dilemma is, is always solid. Books on strategy that, that I recommend to other people.

• 1:34:29Speaker 00

  There aren't that many. So I like Playing to Win by Roger Martin.

• 1:34:36Speaker 00

  I really recommend other kinds of books, strategy books. I mean, it's easy to get a list of strategy books.

• 1:34:45Speaker 00

  But I, I think you should read biographies and histories. I think, you know, the book about Steve Jobs is brilliant.

• 1:34:55Speaker 00

  I like, I like books about business leaders. I'd recommend Andy Grove's book, Only the Paranoid Survive.

• 1:35:08Speaker 00

  And a few others, but I, I recommend that people read more broadly about people. Rockefeller's history is fantastic.

• 1:35:20Speaker 00

  Now, the guy and then the stuff about Rockefeller and how he put together. I mean, Rockefeller was a robber baron and he built an empire and all that. You learn that in school. But what you don't learn in school, he dropped the cost of a gallon of curacy from a dollar to 10 cents.

• 1:35:40Speaker 00

  Okay, that's the laborer. And he made kerosene so inexpensive that he drove all the little mom and pop suppliers out of business, which is why they hated him.

• 1:35:54Speaker 00

  So, you know, he was even still a vicious competitor. But

• 1:36:04Speaker 00

  he, he dropped the price of something by an order of magnitude. Fascinating. So, yeah, I mean, it's important to, to understand stories. Not just theories, but stories.

• 1:36:21Lenny Rachitsky?

  Yeah, I love how this always comes back to just being steeped in history. And the specific point about biographies is really interesting. And we'll link to all these books that you're mentioning in the show notes. Is there a favorite recent movie or TV show that you've really enjoyed?

• 1:36:36Speaker 00

  Oh, yeah, sure. Well, I like Yellowstone, like everybody else. Fascinated by recent movies other than Yellowstone. I'm not sure. Uh, we don't have a TV in the house right now, so I'm sure not connected.

• 1:36:51Lenny Rachitsky?

  That's amazing. That's the dream. I wish I could do that.

• 1:36:57Speaker 00

  There will be a TV, but that room is being remodeled.

• 1:37:00Lenny Rachitsky?

  Hmm, okay, I see. Just a matter of time. Okay, uh, is there a favorite interview question you like to ask people? You interview us maybe specifically around helping you get a sense of are they good at strategic thinking?

• 1:37:14Speaker 00

  Yeah, I like to ask people about what have you done? That was hard that you're proud of?

• 1:37:25Speaker 00

  What have you done that that was difficult?

• 1:37:29Speaker 00

  And what was it and why was it difficult? And how did you, how did you get it done? I like to ask people about what they think was an interesting strategy from any time in the past they want to, they want to call out.

• 1:37:49Speaker 00

  Depending on the person's background, I might ask them about a particular company or situation. And say, you know, why do you think this worked or why didn't it work?

• 1:38:00Speaker 00

  So I don't tend to ask questions about theory. I tend to ask questions about things that happened. And pardon me, I'm looking to, you know, does this person have any knowledge about the world? Or are they just, they just know what the professor said last year? So that kind of thing.

• 1:38:28Lenny Rachitsky?

  Is there a favorite product you've recently discovered that you really like? Whether it's an app, some you bought, some in the house, some on the road?

• 1:38:36Speaker 00

  Well, we got this new memory foam bed that we like. It's pretty amazing. Innovation is pretty, I didn't think we liked that, but we do. I really am fascinated by, I'm about to pull the trigger on buying one of these new smart telescopes.

• 1:38:52Lenny Rachitsky?

  Smart telescopes? I haven't heard of that. What does that make them so smart?

• 1:38:56Speaker 00

  12 inch reflected telescope. And it's too heavy to look around. It's too difficult to set up. But there are some new smart telescopes that run on battery and you can put them outside. And the way they work is, first of all, they know where everything is in the sky, which has been around for a long time. But the new thing is they, they, it's like astrophotography. They'll, they'll look at something for a minute, two minutes, 10 minutes, an hour, and form an image. You don't look through the telescope. You look at it on your phone or your computer. But you can see now the nebula that maybe the web telescope can see. And you can see it now.

• 1:39:41Speaker 00

  You can see stuff out there that you couldn't before. And these are new things for, you know, a thousand dollars, $2,000 that, that are remarkable in what they can do.

• 1:39:55Lenny Rachitsky?

  Excellent choice. Next question. Do you have a favorite life motto that you often find yourself coming back to, sharing with friends, either in your work or in your life?

• 1:40:05Speaker 00

  I used to have a final lecture I give to my MBA students about little pieces of wisdom.

• 1:40:14Speaker 00

  Things not to do.

• 1:40:16Lenny Rachitsky?

  Hmm.

• 1:40:18Speaker 00

  Things that offend people in other cultures. Don't do this if you're a turkey, it means something else there.

• 1:40:27Speaker 00

  But I'd also say, at some point, your spouse or your partner will ask you, do you still love me?

• 1:40:39Speaker 00

  And there's only one correct answer to that question, which is more than ever.

• 1:40:46Speaker 00

  And my wedding ring shows that inside more than ever. So I don't know if that's a joke to be for, but that's

• 1:40:56Lenny Rachitsky?

  Absolutely.

• 1:40:57Speaker 00

  A white, dense piece of wisdom.

• 1:40:59Lenny Rachitsky?

  That is really good advice. Gave me tingles. I'm going to use that 100%. Thank you for some marriage advice.

• 1:41:07Lenny Rachitsky?

  Final question, your daughter Cassandra is a writer as well in fiction, she writes fiction. Is there anything that she taught you about writing that's helped you become a better writer?

• 1:41:18Speaker 00

  Yeah, Cassandra is, oh my God, she's got like 25 books on the New York Times Bestseller list for cheap fiction now. The, she started writing when she was 12 or 13. She had a talent for it.

• 1:41:39Speaker 00

  She's told, she's told me about the tension that you have to create, you know, and she writes novels. And that, you know, it's not interesting unless there's, well, she started, we started talking about this when she was young, she was 14, and she asked me about what is romance?

• 1:42:01Speaker 00

  And well, romance is a barrier. Romance is where there's a difficulty, you know, back to couple. And, you know, there's some kind of, and she said, oh, like he's rich, she's poor. Yeah, like that, or he comes from the north side of town and she comes from the south. I said, like that. Yes. And she said, oh, like he's a vampire and she's dumb.

• 1:42:26Speaker 00

  Yeah, okay, you know, but so, yeah, yeah, she has alerted me and talked me about

• 1:42:37Speaker 00

  that ways of creating that kind of tension in writing. It doesn't work as much in business writing as I'd like, but I tried to create this sense of, it's good strategy, bad strategy. It's a sense of, you know, there's a, there's a tension between the right way and wrong way, or if not right and wrong way, at least there's a tension between should we go left or should we go right? It makes it interesting. Otherwise, it's, it doesn't catch people's emotional course.

• 1:43:14Lenny Rachitsky?

  Amazing. Richard, thank you so much for being here. I think we're going to help a lot more people face bigger challenges and face them head on and put together their action agendas and overcome this crux. Thank you so much for being here. Two final questions. Where can folks find you if they ever want to try to reach out or learn more about the work you're doing these days? And then how can listeners be useful to you?

• 1:43:37Speaker 00

  I have a little website called thecruxbook.com that has information about me and about the books. So there, or go write to me at UCLA. I don't pay attention to the UCLA website anymore, but if you go to thecruxbook.com, there's, there's some email addresses where I can be reached. My little company is called General Imagination. It's like General Motors, but a lot smaller. It's just me. And you can reach me at [email protected].

• 1:44:16Speaker 00

  You know, you can help me out. Oh, tell me stories. Stories about your experiences trying to create strategies, particularly inside organizations, you know, that, how's it worked for you trying to get something done inside organizations?

• 1:44:36Speaker 00

  I'm happy to add more stories to my repertoire.

• 1:44:44Speaker 00

  Oh, and I

• 1:44:46Lenny Rachitsky?

  Wait, say more on that. What is it that people would hire you for?

• 1:44:51Speaker 00

  At this point in my life, I do public speaking. I speak on strategy and growth. And that just got back from Korea doing a talk there. I do a little bit of teaching, not much, mainly for the military people. They want me to come in and do a day on strategy.

• 1:45:16Speaker 00

  And I do foundries. A foundry is where you commit to a problem-oriented approach to strategy, where the organizational leader, the CEO usually, plus another seven or eight people, take two to three or four days off and we meet. And we try to come up with, in the end, an action agenda.

• 1:45:48Speaker 00

  And it's a, it's an interpersonal exercise. I'm the facilitator. I don't tell them what to do.

• 1:45:57Speaker 00

  But I urge them to look more deeply and to understand what these problems actually are. It's interesting to do a foundry. You get, if I focus on problems as I do at the beginning, I'll often get 25 different problems out, up on the board or post it votes around.

• 1:46:16Speaker 00

  And when people look at that, because they haven't ever done this before, when they see the 25 different problems or challenges,

• 1:46:26Speaker 00

  they realize you can't do them all.

• 1:46:30Speaker 00

  And so they begin to get this sense of, oh, jeez, we better focus, we better focus on something. We better do something about some of these. And so then we begin to, you know, go through this thing, well, which ones are really important? And which ones are really addressable? Well, sometimes we don't know if they're a customer or not. Oh, well, is there anybody in the organization who does know? Is there someone we can fly in here who has some perspective on this? How do we? So we begin to try to identify, you know, the one or two key challenges that can actually be addressed. And what are we going to do about it? What are the coherent actions we are up to to to take these off? That's the exercise.

• 1:47:16Speaker 00

  It's from time to time after the founders all say to me, well, where's the strategy? Where's the document with the mission, vision, all that?

• 1:47:27Speaker 00

  No, that's not what we do. We're doing an action agenda.

• 1:47:32Speaker 00

  And

• 1:47:34Speaker 00

  the foundry is is time consuming and

• 1:47:41Speaker 00

  a bit expensive to some extent, but in the, in most of the times we've had foundries, they, they, they really help the company all gather its wits and its resources and do something. Which, you know, I'm very pleased with how the foundries work. It's not so easy to figure out how to take the foundry concept and expand it. I've talked to a couple of consulting firms about, well, you guys like to learn how to do foundries and they say, how does it work? It's one guy for three days. That's, that's not what we do. We do 10 guys for three years.

• 1:48:23Speaker 00

  It's not a business model. Uh, but that's a nice asymmetry for me because, you know, they're not going to compete with me.

• 1:48:31Lenny Rachitsky?

  I love that. I feel like you're about to get a flood of interest and requests. For everyone else, make sure to buy Richard's books. I got them right here. The Crux, Good Strategy, Bad Strategy. Richard, again, thank you so much for being here.

• 1:48:45Speaker 00

  Lenny, thank you for a really pleasant time chatting.

• 1:48:48Lenny Rachitsky?

  It was 1,000% my pleasure. Bye, everyone.

• 1:48:54Lenny Rachitsky?

  Thank you so much for listening. If you found this valuable, you can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. Also, please consider giving us a rating or leaving a review, as that really helps other listeners find the podcast. You can find all past episodes or learn more about the show at lennyspodcast.com. See you in the next episode.