Mental tools for better Strategizing

Yes, strategy is more than moving pieces around a board whether its chess or football. But i am not a big believer in having lots of thinking about strategy- I’ve posted about the 5 critical questions about strateggy before, and here I’ll show you my other tools.

I recently came across Charlie Munger’s 1995 speech, The Psychology of Human Misjudgment, which introduced me to an explanation of what I’d been doing all my business life – using the power of  applying mental tools from a wide array of disciplines and applying these to the business questions I had.

Last week I introduced tools for negotiating, this week we look at strategizing.

Sustainable Competitive Advantage — Structural factors that allow a firm to outcompete its rivals for many years. This occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources or access to highly trained and skilled personnel human resources. It is an advantage (over the competition), and must have some life; the competition must not be able to do it right away, or it is not sustainable. It is an advantage that is not easily copied and, thus, can be maintained over a long period of time. Competitive advantage is a key determinant of superior performance, and ensures survival and prominent placing in the market. Superior performance is the ultimate, desired goal of a firm; competitive advantage becomes the foundation. It gives firms the ability to stay ahead of present or potential competition and ensure market leadership.

Core Competency — “A harmonized combination of multiple resources and skills that distinguish a firm in the marketplace.”  We covered this in part as we reviewed the 5 critical questions to ask about your business.  Determining core competencies or capabilities is not about asking what you are really, really good at now. It is about asking what the organization would need to be distinctively good at in order to play where it wants to play and win how it wants to win. These capabilities may map well to your current activities, or they may represent capabilities you need to build new in order to deliver on the chosen strategy.

Strategy vs Tactics — Sun Tzu: “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” The terms tactic and strategy are often confused: tactics are the actual means used to gain an objective, while strategy is the overall campaign plan, which may involve complex operational patterns, activity, and decision-making that lead to tactical execution.

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Switching Costs—  Switching costs are the costs that a consumer or business incurs as a result of changing brands, suppliers or products. Although most prevalent switching costs are monetary in nature, there are also psychological, effort- and time-based switching costs. A switching cost can manifest itself in the form of significant time and effort necessary to change suppliers, the risk of disrupting normal operations of a business during a transition period, high cancellation fees, and a failure to obtain similar replacement of products or services.  This is the reason you don’t change banks as often as you change shampoos.

Network Effect— “The effect that one user of a good or service has on the value of that product to other people. When a network effect is present, the value of a product or service is dependent on the number of others using it.”  A good example is a phone… owning the first phone was useless you had no one to call, even the first few phones had limited use, the phone only became really useful when a network of users linked into the innovation… the more people who joined the more useful the innovation.

Economies of Scale — “The cost advantages that businesses obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.”  Making more typically makes each unit cheaper.  If you have a rep selling beer and a truck delivering beer the more you sell the cost of the rep and the delivery reduces per unity… until the business is big enough to need a second rep and a second truck. (this is called a diseconomy of scale)

Economies of Scope –  Whereas economies of scale for a firm involve reductions in the average cost (cost per unit) arising from increasing the scale of production for a single product type, economies of scope involve lowering average cost by producing more types of products. This makes product diversification efficient if they are based on the common and recurrent use of proprietary know-how or on an indivisible physical asset.For example, as the number of products promoted is increased, more people can be reached per unit of money spent. At some point, however, additional advertising expenditure on new products may become less effective (an example of diseconomies of scope). Related examples include distribution of different types of products, product bundling, product lining, and family branding.  Example- if you have a sales rep selling beer and a truck delivering the beer… maybe you could sell wine and spirits as well.

Barriers to Entry— “A cost that must be incurred by a new entrant into a market that incumbents don’t or haven’t had to incur.”

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Price Elasticity— “The measurement of how responsive an economic variable is to a change in another. It gives answers to questions such as ‘If I lower the price of a product, how much more will sell?’” 

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