7 Powers of Business Strategy

Business strategy has only one ultimate aim, maximize the potential business value, and can do this by utilizing one of the 7 available powers. That’s the central axiom underlying foundation of business strategy, as detailed in the 2016 book “7 Powers: The Foundations of Business Strategy” by Hamilton Helmer.

7 powers by hamilton helmer

Business Strategy vs. Operational Excellence

While the purpose of business strategy can be summarized in just a few words (“maximize the potential business value”), those few words carry a lot of weight. Let’s break them down.

Business value is defined in the same way a value investor looks at a business: the sum of initial capital investment, the discounted cash flows from business operations, and the discounted terminal value. Finance students will recognize this as the Net Present Value (NPV) of an investment.

The definition of business strategy contains another very important word: potential. A strategist’s job is to help the firm identify business opportunities that maximize the return potential. However, it’s the management team’s job to ensure the potential value is captured and converted it actual business value.

The best way to maximize captured business value is by achieving operational excellence. This is an important observation because it clarifies why operational excellence is not a business strategy (even though it is so often designated as such).

To achieve business success, you need both a great strategy and great execution. If either is lacking, the business might not be so successful. That’s why we often hear that a “great strategy poorly executed” is not worth more than a “poor strategy greatly executed.”

Fundamental Business Equation

Helmer distills the definition of business value into the following fundamental business equation:

$latex V = M_{0}\ g\ \overline{s}\ \overline{m}&s=3$


  • $latex V$ = potential business value
  •  $latex M_0$ = current market size
  •  $latex g$ = discounted growth factor
  •  $latex \overline{s}$ = long-term average market share
  • $latex \overline{m}$ = long-term average differential margin (margin in excess of cost of capital)

$latex M_0$ and $latex g$, together, represent the Market Scale. $latex \overline{s}$ and $latex \overline{m}$, together, represent the Power.

Power is the potential to realize persistent differential returns and the key to value creation. Combining Power with operational excellence is a sure way to create significant enterprise value.

The third and fourth factor of the equation, $latex \overline{s}$ and $latex \overline{m}$, are carefully defined as the long-term average of the market share and differential margin. The long-term nature is a key attribute of what makes a Power, a Power.

The reason why a Power must be durable is rooted in the mathematics of the discounted cash flow model. As Helmer puts it in the book: “If a company were growing at 10% per year, the next three years account for only 15% of its value.” In other words, future cash flow is very important, and Power is what ensures you get those.

Aside from the long-term nature, Power has two other important attributes: benefits and barriers. A benefit is something that materially improves the cash flow to the firm. A barrier is something that prevents competitors from arbitraging out the benefits.

Strategy Statics: The 7 Powers

Strategy statics are defined as the study of strategic position at a single point in time. According to Helmer, there are only 7 Powers, or strategies, available to a company. The 7 powers are:

  1. Counter-Positioning: Adopting a new, superior business model that the incumbents can’t easily or are unwilling to replicate due to potential damage to their current operations.
  2. Cornered Resource: Preferential access at attractive terms to a coveted asset that can independently enhance value.
  3. Scale Economics: A business in which the per unit cost declines as production volume increases.
  4. Network Economics: A business in which the value realized by a customer increases as the install base increases.
  5. Switching Costs: The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.
  6. Branding: The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.
  7. Process Power: Embedded company organization and activity sets which enable lower costs and/or superior products, and which can be matched only by an extended commitment.

The exhaustive nature of the 7 powers makes it an attractive framework for business strategists. Each of the 7 powers provides a benefit to the firm that has the power and presents a barrier to the competitors that don’t.

Benefits from Power

The benefits generated by Power can be separated into two major categories: either they increase the perceived value of the products or they decrease the cost of making the product. We can analyze how this enhances the potential business value through the lens of the value/price dynamic chart I discussed in a previous blog post:

Increasing the perceived value while maintaining the acquisition cost will increase a customer’s willingness to purchase. This will grow the top line of the business. Decreasing the cost while maintaining the perceived value for the customer will increase the firm margin. This will grow the bottom line of the business.

Benefits are relatively common and often bear little positive impact on the company value as they are generally subject to full arbitrage.

Barriers due to Power

The barriers imposed by Power can also be split into two categories: the competitor is either unwilling or unable to challenge the Power.

The best way I found to think of how a barrier works in the real world is to view it through the lens of Sun Tzu’s Art of War: “The supreme art of war is to subdue the enemy without fighting.” A great barrier will cause your competitor to evaluate that the cost of breaking down the barrier exceeds the benefits it would yield after the barrier has come down.

Unlike benefits, barriers are uncommon and often a true source of company value specifically because they can prevent arbitrage. Often, it is the quality of the barrier that truly defines the impact of the Power.

Strategy Dynamics: Technology, Invention, Value

Strategy dynamics, on the other hand, is the study of strategic development over time.

Technology Sows Invention, Invention Creates Value

Helmer identifies two key fundamental forces that drive strategy dynamics: invention and technology.

  1. Invention necessarily precipitates Power. The age-old adage “me too won’t do” guides the creation of Power. Invention is fueled by a founder’s passion or domain mastery, not by the analyst’s Excel sheets.
  2. The relentless forward march of technology assures tectonic shifts in the external environment will always create new threats and opportunities for firms, large or small.

While the relentlessness of technology creates opportunity which, through invention, can yield Power, that doesn’t guarantee a successful business strategy. Remember, the aim of a strategist is to maximize the potential business value, and the business value is a combination of Power and Market Size.

The degree to which invention creates compelling value for the customer determines the potential market size for your product or service. There are three distinct paths to creating compelling value: capabilities-led, customer-led, and competitor-led.

  • Capabilities-led: firms translate some capability into a product with compelling value.
  • Customer-led: incumbents know of the unmet demand but don’t know how to satisfy it.
  • Competitor-led: inventor beats incumbent with a product that elicits a “gotta have” response.

The relentless forward march of technological progress sows the ground for inventions to create compelling value.

Business Lifecycle & 7 Powers

A second aspect of strategy dynamics is the relevant timing of each of the 7 powers in relation to the business lifecycle. I previously discussed the business lifecycle when I wrote about the six phases of transient competitive advantage.

The concept of the transient competitive advantage is not entirely compatible with Helmer’s theory of the 7 Powers, since a key attribute of a Power is its long-term nature and a transient competitive advantage is by definition limited in time. However, that won’t stop us from trying.

According to Helmer, the most critical part of establishing power is during the business take-off – basically that’s when the business sees explosive growth. Therefore, the timing for introducing a Power can be split into three windows:

  • Before take-off (origination)
  • During take-off
  • After take-off (stability)

The origination phase is characterized by the period before a firm clears the compelling value threshold. In other words, it’s when the groundwork for Power is laid but the market size isn’t there yet for a Power to become relevant.

This phase aligns with Phase 1 of the transient competitive advantage framework. Two Powers become available during this phase: counter-positioning and cornered resource.

The take-off phase is characterized by a period of explosive growth as the compelling value becomes obvious to the customer and the product elicits a “gotta have” response.

This aligns with Phases 2 and 3 of the transient competitive advantage framework. Three Powers become available during this phase: economies of scale, network effects, and switching costs.

The stability phase is characterized by a high growth but not exponential growth period. The crucial element is that growth has slowed enough for the market size to not double every two to three years. That’s the case when annual growth is around 30-40%. Growth beyond that creates sufficient flux in the market that counter-moves by competitors can spark change in market leadership.

This aligns with Phases 4 and 5 of the transient competitive advantage framework. Two Powers become available during this phase: brand and process.

Further Discussion

Low-effort strategy development

From the fundamental business equation $latex V = M_{0}\ g\ \overline{s}\ \overline{m}$ one could argue that the low-effort way a strategist can increase the potential business value is by redefining the market size. For example, rather than focusing exclusively on the domestic market, you expand regionally and thus perhaps 10X $latex M_{0}\. That will drastically increase V, all things kept equal.

Obviously, all things are not equal since expanding into new geographies also introduces new potential competitors which will impact your s and m. Therefore, the equation provides business leaders with a good tool to evaluate business expansion by asking the question: what happens to V if such a decision is taken.

Powers & Monopolies

The most important factor of a Power is its ability to put up barriers to existing and potential competitors from arbitraging out the differential margins obtained as a benefit of the Power. This is in line with Peter Thiel’s mantra that “competition is for losers” because it usually drives down prices and margins, but contrary to Jan Eeckhout‘s perspective that market power lack of competition is bad for the economy as a whole because it prevents competitive forces from driving down consumer prices.

Importance of Market Share

You often hear people say “Revenue is a vanity figure” because, really, it’s the free cash flow generation that keeps the business running. Similarly, one could argue market share is a vanity figure because share size without a suitable (differential) margin will not bring you healthy free cash flows.

However, market share is relevant if your chosen Power is economies of scale because, typically, large-volume production provides room for lowering input and processing costs.

Power Density

We can think of a Power as the defining key winning attribute of a business. Therefore a firm should double-down and allocate as much resources as possible to energize this Power. This would yield highly specialized firms with intense “Power Density,” which we define as firm resources allocated to energize the Power relative to a firm’s total resources available to the firm. Allocating as much resources as possible to a certain Power would hinder vertical integration strategies due to lack of sufficient resources.

That raises the question whether a single firm successfully manage resource allocation across such diverse power requirements? Or will it always get beaten by a strategic alliance of two distinct Power-dense firms?

For example, Intel currently manufactures and designs chips, requiring economies of scale for manufacturing and a different power (cornered resource, switching costs, brand, process) for design. The alliance between TSMC (manufacturing) and NVIDIA (design) has made it such that Intel is currently uncompetitive in both businesses.

Notes on Disruptive Innovation: Intellectual History and Future Paths

My notes on HBS Working Paper 17-057 (PDF) titled Disruptive Innovation: Intellectual History and Future Paths by Christensen C., Altman E., McDonald R., and Palmer J. It complements my previous blog posts like Business Theory of Disruptive Innovation, Jobs To Be Done: Business Raison d’Etre, and Managing the Six Phases of Transient Competitive Advantage

3 principal components of disruptive innovation:

  1. The pace of technological progress outstrips growth in market demand for higher-performing technologies, causing incumbents to overserve the market and, as a result, creating a gap in lower market
  2. There is a strategically important distinction between different types of innovation
    • Sustaining innovations: improve product along existing dimensions of performance (make a good product great)
    • Disruptive innovations: usually cheaper but better at other dimensions (create a new product)
  3. Established profit models constrain investment in new innovations because they are typically less profitable

Anomalies uncovered in further research

  1. At first, the idea is that incumbents don’t invest in disruptive innovation. But that’s not true: investment ranges from little to freely flowing
    • Opportunity framing vs. threat framing: threat framing usually leads to greater resource allocation
    • However, despite investments, inertial forces prevented from adoption
  2. A small subset of incumbent leaders successfully dealt with disruptive innovations
    • autonomous business unit separate from parent company free to enact own business mode
  3. Different types of disruptive innovation:
    • Low-end disruptions: enter the low-end of the market, solidify market share and position in the value network, then move up-market
    • New-market disruptions: compete against non-consumptions
  4. For disruption to occur, industries must be structured so that producing higher-performing products and services results in higher profitability for firms, giving them an incentive to go upmarket.
  5. Specific industries have an “extendable core” that allows firms to produce at first simple products at low cost, but eventually can make more sophisticated things at lower cost

Causal Pathway for Disruptive Innovation theory

  1. Insidious resource allocation process within the organization that favors “sure” investments
  2. Customers ultimately provide the firm with the resources it needs to survive
    • Sustaining innovation serves and is valued by existing customers
  3. As performance improves, there is a more significant overlap between different market segments
    • Disrupters invade contested up-market to increase economies of scale
    • Incumbents retreat to uncontested up-market to protect profitability

Research with Intel on investment in disruptive innovation.


  • If the innovation was sustaining and Intel was an incumbent in the target market, the venture would succeed.
  • If the innovation was sustaining and Intel was an entrant in the target market, the venture would fail.
  • If the innovation was disruptive and an autonomous business unit was formed to pursue it, the venture would succeed.
  • If the innovation was disruptive and an integrated business unit was formed to pursue it, the venture would fail.

Using business plans to classify the ventures and survival to proxy performance, the theory correctly predicted the outcomes of 45 of the 48 businesses (94 percent accuracy rate) (Raynor, 2011)

Refining Performance Trajectories

  • The variance in the speed of disruption across different industries
  • The variance in speed of disruption within the same industry over time

Responding to Disruptive Innovation

Incumbent Response Strategies

  • Separate organizational unit tasked with developing or commercializing the new innovation
  • Aggressively invest in existing capabilities to extend current performance improvement trajectories to slow or delay the onset of disruption
  • Boldly retreat by proactively repositioning to profitable new niches
  • Organizational ambidexterity to manage conflicts arising from pursuing different types of innovations simultaneously
  • Redefine the organization’s identity to convince customers to value their products not on functional dimensions but on characteristics like nostalgia, authenticity, etc
  • Partner with or license startup technology once it advances beyond a certain threshold or acquire it altogether
  • High brand status can help incumbents re-emerge after experiencing a decline due to disruption

Hybrid offerings

  • Combine the new technology with the existing one to ensure a smoother transition
  • Improve existing technology while learning the uncertain technology
  • The performance difference between using new technology to enhance existing products and deliver to an existing customer base (sustaining) versus using hybrid technology to target new customers or applications (disruptive)
  • Hybrid may be of particular use to enter a market to support both legacy and new use
  • Business model hybrids?

Platform Businesses


  • Platform businesses are built around modular architectures; the primary competitive advantage is interaction with one another and building upon the others’ products
  • Platform and network-based business strategies are emerging more rapidly, especially in IT- and cloud-enabled business models
  • When products are not yet good enough to satisfy customer performance requirements, firms rely on highly internally interdependent and integrated product architectures to maximize performance. Firms cannot afford to adopt modular architectures because standard interfaces compromise performance
  • When performance is satisfied, the basis of competition shifts to other product dimensions such as convenience, customization, price, and flexibility
  • When the shift to less integrated happens, modular architectures enable simpler and more efficient interfaces between products. Disruptive entrant incorporating modularity strategy can be highly effective

Disruption through incumbent transitions to platform business

  • When in an industry’s lifecycle, it’s effective for the incumbent to transition to modular/platform
    • If differentiation is performance-based, platform business is sub-optimal
    • If the industry over-serves and competition basis shifts to convenience, the platform may prove viable

Disruption through complementor ecosystem and network effect

  • A strong link between the management of complementor ecosystems for disruptive innovation
  • The competitive success of platform strategy hinges on the ability to create and harness network effects
  • A pricing strategy can disrupt the incumbent. E.g., offer free products to gain adoption
  • To build network effects, a firm may adopt strategies that rely on revenue sharing or royalties rather than sales revenues
  • Coopetition as a form of defense against disruption

Financial Metrics

  • Disruption is not a technology problem; it is a business model problem (and tightly related to the profit model)
  • Two problems with Profit Model
    • A measure of success -> drives investment decisions, especially when compensation is tied to financial success
    • Shows short-term success -> drives investment decisions, avoiding the long-term return perspective
  • New startups without defined profit formula as a success metric gauge success in different ways
  • The use of financial metrics may unconsciously create bias against disruptive innovations
    • Implications of marginal cost thinking and sunk cost fallacy
    • Valuation metrics don’t work if you underestimate the true benefits of innovation
    • Ratio-based metrics = manage by metrics (balance sheet management)

Updates to My Blog Post

I have updated my blog post titled “Managing the Six Phases of Transient Competitive Advantage” to include the Management Priority in each of the six phases:

Phase 1: The management is focused on its vision and aims to deeply understand the job to be done.

Phase 2: The management is focused on its vision and aims to find the right customers for its new product or service.

Phase 3: The management is focused on the operations as it aims to establish the right business and profit model to repeatedly deliver to the customer needs.

Phase 4: The management is focused on the operations as it aims to maximize the market opportunity.

Phase 5: The management is focused on finance as it aims to maximize the profit & loss statement.

Phase 6: The management is focused on finance as it aims to maximize the balance sheet statement.

Xi Jinping’s 10 Concentric Circles of Core Strategic Interest

globe in close up

In this blog post, you can find a summary (with additional notes) of Xi Jinping’s 10 Concentric Circles of Core Strategic Interest as outlined by the Honorable Kevin Rudd in his book The Avoidable War which is likely the most important book I’ll read this year.

It takes courage to not only provide, in great detail and in a respectful manner, careful context to the current mindset of Chinese political leadership but to do so with neither the cynical view of the inevitability of Thucydides’ Trap nor the naive view that things will simply find a way to work themselves out for the best.

I’m not in the position to argue the merits of the proposed Managed Strategic Competition framework, but I certainly subscribe to its aspirations and long-term goals. The book’s an excellent read for anyone who thinks understanding China’s goals is relevant to their business today and in the future.

I don’t claim any ideas or insights provided in this blog as my own. I’m merely providing the summary and notes for those looking for a primer. If you want more context on this topic, please go buy the book.

#1 – Centrality of Xi Jinping & CCP

The underlying axiom of Xi Jinping’s leadership is as follows: to ensure a prosperous future for the Chinese people, the Chinese Communist Party (CCP) must remain in power indefinitely, and Xi Jinping is the only person capable of leading the CCP.

The axiom predicates on Marxist-Leninist ideology that proposes the establishment of a socialist dictatorship by the people as a prelude to achieving communism, as opposed to the (capitalist) dictatorship of the elite.

To understand the CCP and Xi, you must accept they are True Believers of the ideology, just like the Soviet leadership was under Stalin.

Sidenote on Stalin, to quote biographer Stephen Kotkin: “But from the secret archives, what we’ve learned is that behind closed doors when these guys didn’t expect anyone to overhear, they talked like Communists: of class warfare, kulaks, global imperialism, finance capital. It was not just about personal power, careerism, and control. They were, to a great degree, true believers. There was a deep intellectual and emotional commitment to Marxism. This applies in spades to Stalin.” https://www.pushkinhouse.org/blog/interview-with-stephen-kotkin

Once you accept that the ideology is fundamental to Xi and the CCP’s worldview, you can frame the CCP’s existential struggle to remain in power. From this perspective, it’s only natural to understand that the party is haunted by the 1991 fall of the Soviet Communist Party. China is now one of only four remaining communist countries next to Cuba, Laos, and Vietnam. And, by far, the most significant power.

The obsession with the fall of the Soviet Communist Party and viewing it as a great tragedy also aligns with Xi’s friend Vladimir Putin’s perspective on the matter. It seems like something Xi and Putin can intellectually and perhaps emotionally bond over.

It also deserves to be mentioned that the CCP has deeply studied what caused the fall of the Soviet Communist Party. Long story short, the fall is attributed to weak men unable to stop the forces that brought down the party. The CCP has vowed this will not happen to China, which naturally requires strong men to lead the country.

That isn’t to say there have never been discussions inside China about whether it should transform into a multi-plural social democracy. Discussion took place since Deng Xiaoping was in power. However, after decade-long consideration, in 2001, the CCP concluded that there should be only 1 party and that a single-party system was fundamental to the long-term survival of China. Note that the CCP came to this conclusion long before Xi Jinping rose to power.

Under Xi, however, there’s been a transition to a more forceful ideological nationalism. The Chinese system used to be described softly as “Socialism with Chinese Characteristics.” However, Xi frames the system as part of “China’s historical greatness, across its dynastic history, always lay in strong, authoritarian, hierarchical Confucian governments.”

On a personal level, Xi Jinping aspires to secure his leadership position and legacy to the level of at least Mao Tse-tung but definitely surpassing Deng Xiaoping.

This is already the case with Xi Jinping’s speeches and writings, formerly adopted by the CCP as Xi Jinping Thought, similar to Mao Tse-tung Thought and exceeding Deng Xiaoping Theory.

The CCP identifies Five Poisons as the five main perceived threats to the stability of CCP rule as follows:

  • Uyghur supporters of the East Turkestan independence movement
  • Tibetan supporters of the Tibetan independence movement
  • Adherents of the Falun Gong
  • Members of the Chinese democracy movement (including Hong Kong)
  • Advocates for the Taiwan independence movement

They are a thread because (1) they provide an alternative vision of China, and (2) they operate inside and outside China.

A short word on the United States: Xi and the CCP see the United States as the only force capable of stopping China’s inevitable rise to global superpower. This preoccupation with the United States as the primary blocking object standing between China today and China’s future permeates throughout Xi’s strategic and tactical analysis ranging from reunification with Taiwan to transforming into a self-sufficient domestic economy.

The distrust of the United States is rooted in the complex history of post-Qing China and the CCP’s rise to power. Below is a timeline with the most relevant events:

  • 1882: US Chinese Exclusion Act prohibits all immigration of Chinese laborers for 10 years. It was the only law ever implemented to prevent all members of a specific ethnic or national group from immigrating to the United States.
  • 1911: Xinhai Revolution against the Qing emperor under the lead of Sun Yat-sen, then studying and raising funds in the United States
  • 1912: the founding of the Republic of China by Sun Yat-sen’s KMT
  • 1917: United States enters World War I and calls upon China to join and send troops to the front. China agreed with the understanding that the German territories in the Chinese province of Shandong would be returned to China after the war was won
  • 1921: the founding of the Communist Party of China (CCP)
  • 1921: “big three” reject all of China’s demands at Versailles to appease Japan, leaving China disillusioned to the core
  • 1922: The United States fails to support Sun Yat-sen’s newly formed government, even though it is modeled after American democracy, against the local warlords. This forces Sun Yat-sen to call upon Moscow for strategic support.
  • 1923: Soviets help establish friendly relations between KMT and CCP to defeat the warlords and unify China
  • 1925: Sun Yat-sen, the founder of the Republic of China, dies and is succeeded by Chiang Kai-shek
  • 1928: the reunification of China following the defeat of the last of the warlords during the Northern Expedition
  • 1929: KMT and CCP are preparing for civil war; with KMT looking to the United States and CCP looking to the Soviet Union as respective allies
  • 1931-1937: United States assistance fell short of KMT military and financial needs against the Japanese invasion and communist insurgency. In the end, the United States withdrew support for KMT, fearing direct conflict with Japan. This resulted in enormous losses of Chinese lives fighting against the Japanese.
  • 1946: US fails to clarify to what extent it would help the KMT against the CCP in the civil war. It stops military and financial support for the KMT and misguidedly aims to reconcile nationalists and communists. Meanwhile, the Soviet Union continues its military support for CCP.
  • 1946: US fails to sufficient distance itself from the KMT to make CCP (Mao) believe it is a reliable ally; therefore, Mao concludes the Soviet Union is the only reliable ally
  • 1949: Founding of the People’s Republic of China (mainland) and retreat of the KMT and its Republic of China to Taiwan
  • 1949-1960: further deterioration of China-US relationship
  • 1971: Nixon and Kissinger’s “Opening to China” + Zhou Enlai’s “Ping-pong diplomacy” was positively received by Mao Tse-tung. Positive reception predicates on
    • Deterioration in Sino-Soviet relationships post-Stalin, creating a threat on China’s northern border
    • Economic implosions of the Great Leap Forward and Cultural Revolution
    • DOES NOT predicate on CCP’s reappraisal of western values or ideals, but pure pragmatic survival
  • 1972: Shanghai Communique representing the United States’ first diplomatic negotiations with PRC since its 1949 founding
  • 1979: formal diplomatic normalization
  • 1979: US Taiwan Relations Act
  • 1989: US sanctions following Tiananmen Square are only temporary
  • 1989: Final agreement on the Sino-Soviet border after 300 years of dispute revitalizes the Sino-Soviet relationship
  • 1991: Fall of the Soviet Union; CCP politically and ideologically horrified about the implosion of Soviet communism, however, sees upside that this eliminates Soviet long-term threat to national security. This eliminates a key strategic rationale for the Sino-US relationship since 1970.
  • 1996: China launches missiles into waters around Taiwan to discourage democratic elections prompting the US to respond by showing political and military support
  • 1997: Asian Financial Crisis prompts Chinese thinking to reappraise the benefits of the laissez-faire, free-market, anti-state approach by the IMF
  • 1998: Chiang Mai Initiative was proposed by China as an alternative to the American-led IMF when stabilizing measures are needed
  • 1999: US-guided missiles strike the Chinese embassy in Belgrade during Balkan War. The US claims accident: China claims deliberate attack
  • 2001: China admission to the World Trade Organization, opening up global markets
  • 2001-20xx: US “war on terror” post-9/11 helps China to position itself on the international platform as a reasonable counterweight against Western aggression
  • 2008: Financial crisis originating in the United States is to China:
    • (1) proof of the weakness of the capitalist system
    • (2) proof that the weak American system can cause damage around the world
    • (3) opportunity to position itself as the engine of global economic recovery

#2 – Maintaining and Securing National Unity

Suppose we accept the CCP’s core belief that they must remain in power to ensure the long-term survival of China. In that case, it is logical to accept that anything that would challenge this power represents an existential threat to the CCP and the Chinese people.


This alternative is no better exemplified by Taiwan because it represents a parallel, successful, functioning, democratic version of the Chinese society built by the CCP post-civil war. Furthermore, Taiwan has also proven it is possible to transition from a single-party authoritarian state to a multi-party democratic state with minimal bloodshed. Therefore, Taiwan is not only an alternative vision of China but also a blueprint for democratic transition.

China’s approach to Taiwan has been under the motto “One Country, Two Systems,” which is also used for Hong Kong and Macau. The underlying idea is that the countries would naturally transform into a single system through economic entanglement over time.

However, this is a historic miscalculation that not only China but also the West made. The West expected that the economic integration of China with the world economy would lead to a natural transformation into a modern liberal Western democracy. Similarly, China hoped that the economic integration with Taiwan would lead to a natural transformation into a One China.

The expectation that economic integration leads to political assimilation is also present in today’s Europe Union, which is under constant stress (as evident during the 2014 Financial Crisis).

Of course, neither happened.

If anything, the economic fruits borne from the increased economic interaction are always seen as evidence that the system in place is, in fact, successful. So, China believes it has proof that the Chinese system works, and Taiwan believes it has proof the Taiwanese system works.

In addition to the false idea that economic integration automatically leads to cultural and political assimilation, there’s also the aspect of national identity developing over time. Taiwanese people born and raised in the 1950s and 1960s may still feel strongly connected to the Chinese identity through family ties. However, this is much less so for Taiwanese born in the 1980s and 1990s, as they have much less personal experience with the mainland Chinese identity.

In other words, the feeling of national unity isn’t present because there’s no shared national identity. Hong Kongers feel Hong Kongese, and Taiwanese feel Taiwanese.

This directly threatens the CCP’s need to maintain and secure national unity and resulted in the 2019 actions in Hong Kong. The protests and China’s response popped the bubble of any Taiwanese believing in the “One Country, Two Systems” mantra.

From China’s perspective, that leaves only a few options available to force the reunification with Taiwan: political isolation, economic debilitation, or military coercion.

Political isolation is an ongoing process with China systematically peeling away Taiwan’s international partners with the promise of economic benefits.

Economical debilitation is an ongoing process, both direct and indirect. A direct approach is exemplified by China’s ban on its citizens traveling to Taiwan as individual tourists in 2019. Indirectly, China can use its position within international institutions to prevent or slow Taiwan’s international trade growth.

Military coercion is not currently on the table but is inscribed in China’s anti-secession law as a means of last resort in case all possibilities for a peaceful reunification are completely exhausted. https://www.mfa.gov.cn/ce/ceus/eng/zt/999999999/t187406.htm

Tibet, Xinjiang, Inner Mongolia, Hong Kong, & Macau

Taiwan’s situation is unique, to say the least. In addition to the specific historical setting, it’s the only region separate from the mainland by sea. That distinguishes it from the situations in Tibet, Xinjiang, Inner Mongolia, Hong Kong, & Macau, which are connected to the mainland.

Xi and the CCP have identified three evil forces threatening national unity: splitism, extremism, and terrorism. It utilizes these three forces to justify its actions in any of these regions.

The observation that a slow, gradualist approach to reunify Taiwan and Mainland China has failed, combined with the emergence of a solid national identity in Hong Kong and Taiwan, has made China take more active steps in ensuring national unity.

In 2019, when Hong Kong protestors took to the streets against a draft extradition law, the Hong Kong government, backed by China, forcibly struck down the protests. It eventually enacted the Hong Kong National Security Law. This effectively ended the “50 years period of one country, two systems” principle, which China had agreed to as the condition for the peaceful handover of Hong Kong from the United Kingdom.

Similarly, in Tibet, Xinjiang, and Inner Mongolia, the Chinese government has acted with increased aggression to impose a unified Chinese national identity and culture upon the local population. The CCP considers the regions potential sources of “three evil forces” threatening national unity: splitism, extremism, and terrorism. It utilizes these three forces to justify its actions in any of these regions.

Xi is indifferent to the solid and sustained international reaction against Chinese actions in or against Taiwan, Hong Kong, Tiber, Inner Mongolia, and Xinjiang. He believes that the national security imperative of “complete security” is more important than any foreign policy or reputational cost to the regime.

Furthermore, Xi is encouraged by the fact that the rest of the world is, to various extent, dependent on the Chinese economy. Thus, he believes international political reactions are primarily symbolic, largely superficial, and entirely temporary. This understanding is supported by the fleeting nature of the political and economic sanctions following the 1989 Tiananmen. It was re-reconfirmed by the reaction to the 2019 Hong Kong crackdown.

#3 – Growing the Chinese Economy

Xi’s understanding of modern economic theory is allegedly relatively limited. While he is primarily driven by Marxist-Leninist ideology, Xi understands that ensuring economic prosperity is fundamental to political legitimacy and national unity.

The relationship between an authoritarian regime and its people is often described as an unspoken, unwritten social contract. In this social contract, the people accept giving up their freedoms in favor of economic growth and higher living standards. However, as Stephen Kotkin points out about Putin’s Russia, “There is no contract. The regime doesn’t provide the economic growth, and it doesn’t say, Oh, you know, we’re in violation of our promise. We promised economic growth in exchange for freedom, so we’re going to resign now because we didn’t fulfill the contract.” https://www.newyorker.com/news/q-and-a/stephen-kotkin-putin-russia-ukraine-stalin

It’s crucial to frame the economic discussion within the context of Xi’s first core strategic interest of staying in power. Therefore, economic prosperity is merely a practical tool to secure national unity; unity is a prerequisite for ensuring CCP remains in power. While Xi recognizes economic prosperity is a powerful and primarily peaceful tool, economic prosperity is not the only tool available to safeguard national unity.

Furthermore, Xi also believes for China to defend itself, it must build power that isn’t reliant on external partners, systems, manufacturing, or technology.

Xi has identified Five Major Challenges when it comes to the economy:

  1. How to maintain economic growth to provide employment and support rising living standards while …
  2. … maintaining the optimal balance between state and market without ceding party political control to entrepreneurs
  3. How to better distribute the benefits of economic growth, so economic inequality is reduced
  4. How to impose carbon constraints to deal with environmental challenges without harming economic growth
  5. How to manage the external economic pressures from the United States on trade, investment, and technology

Under Xi Jinping, China’s political economy has undergone four transitions. I will briefly cover the first three and provide more detail with the fourth.

Pre-Xi: “Reform and Opening-Up”

The Pre-Xi economic strategy was designed under Deng Xiaoping and focused on rapid GDP growth to join the developed world as quickly as possible. The model turned China into the world’s manufacturing powerhouse as it focused on labor-intensive, low-wage manufacturing for export. It was characterized by high levels of state investment and a significant role for state-owned enterprises (SOEs). Any environmental impact resulting from the rapid economic growth was largely ignored.

2013-2015: “Adopting The Decision.”

Following the appointment of Xi Jinping as the General Secretary of the Chinese Communist Party in 2012, the first phase of Xi’s economic transition began with the adoption of “The Decision.” The Decision was a set of sixty decisions related to specific economic reform.

A key decision was to let the market forces play a decisive role in the economy. This follows the economic success resulting from engaging with an open, international free market during the previous three decades,. Furthermore, the party would encourage rapid expansion of private enterprise in the services, financial, and technology sectors as the new engine of economic growth. Of course, SOEs still played a significant role in ensuring Party control over the economy. Lastly, the party would uphold new principles of environmental sustainability.

2015-2016: “Deleveraging.”

The Great Deleveraging was sparked by the 2015 Chinese Financial Crisis, caused by the proliferation of private margin-lending to invest in speculative assets. Xi interpreted the cause and effect of the crisis as ideological confirmation that reckless expansion of capital is harmful to society as a whole.

Among the many measures taken to stabilize the equity markets include a general halting of 2013 market reforms favoring a more market-oriented economy and imposing tighter capital controls.

2019-2020: “Return to 2013.”

Halfway through 2018, it was clear that economic growth was slowing significantly. The reason was two-fold.

First, the actions taken during and after the 2015 Chinese Financial Crisis made it more difficult for the private sector to acquire the capital and business confidence needed to expand domestically and globally. By 2018, the private sector was responsible for 90% of job growth, 80% of urban development, 70% of technological innovation, and 50% of the country’s taxation. The US-China Trade War and tariffs also played a role.

Xi offered a multilayered response to the 2018 economic growth challenges.

  1. First, the new “Institutional Economic Reform” represents a partial return to the 2013 blueprint.
  2. Second, reiterating the centrality and importance of private enterprise as China’s principal economic growth engine
  3. Third, the internationalization of specific industries allows for foreign competition to enter the market with the goal of improving the domestic effectiveness of the credit-allocation system for private enterprise
  4. Fourth, internationalization of trade, investment, and IP standards to resolve the ongoing US-China trade war
  5. Fifth, Financial stimulus to artificially prop up the economic growth

2020-now: “New Development Concept.”

The 2018 US-China Trade War profoundly affected Xi. It confirmed his personal bias and fear that external US power could undermine China’s growth strategy. This experience has sharpened Xi’s pre-existing economic worldview in a more ideological, conservative, and nationalist direction.

The New Development Concept is Xi’s economic strategy with which he aims to guide China through an increasingly dangerous world. It is meant to “ensure our survival” through “foreseeable and unforeseeable storms.” Xi understands that national power relies on economic as well as military power.

The ideological root of this economic strategy goes back to 2017 when Xi announced the Principal Contradiction facing the Communist Party had changed. “Principal Contradiction” is a key theoretical term in old-school Marxist dialectical materialism. Xi’s use of it illustrates once more that he’s a True Believer in communism.

Since 1981, the principal contradiction the party had identified and worked to resolve was “the ever-growing material and cultural needs of the people versus backward social production.” It was resolved with the central task to generate rapid GDP growth by reform and opening up.

In 2017, Xi identified the new principal contradiction: “the ever-growing people’s need for a better life versus unbalanced and inadequate development.” It is to be solved with a more balanced, better-quality development across regions and sectors.

The New Development Concept is rooted in Xi’s fondness for the real economy of physical goods and assets over Xi’s disgust for the fictitious economy of speculation and financialization. This is another ideological Marxist perspective that considers that the fictitious economy produces noting of material value while extracting wealth from the middle-to-low-income class.

The new economic strategy also serves Xi’s core priorities of protecting China and the CCP against external or internal opposing forces. The New Development Concept rests on three main pillars forces that can be summarized as follows:

  • Common prosperity: prioritize security, political stability, and economic equality over rapid individual wealth accumulation
  • Dual circulation: prioritize societal cohesion over economic efficiency
  • Self-sufficiency: prioritize national self-sufficiency over the benefits of open international exchange

Prioritize national security, political stability, and economic equality over rapid individual wealth accumulation.

This opposes directly Deng Xiaoping’s economic strategy of rapid GDP growth, which allowed “some people and some regions to become prosperous first, for the purpose of achieving common prosperity faster.” Deng’s strategy is best captured with his slogan, “to get rich is glorious.”

Xi Jinping realizes that private wealth accumulation may lead to alternative sources of power than the party. Preventing wealthy individuals from becoming too powerful suppresses rising internal, opposing forces from materializing. This is best illustrated with the broad crackdown on technology firms exemplified by the public humiliation of Jack Ma..

Xi no longer cares what the billionaire class thinks is the best direction for China. He no longer cares if they lose money as he pursues his core national strategic priorities.

Prioritize social cohesion over economic efficiency

This force aligns with the priority of the second core strategic interest of national unity over the third core strategic interest of growing the economy.

Xi Jinping realizes it’s not safe to rely solely on the expectation of continuous economic growth as glue to hold the nation together. Likely, the experiences of the 2015 Chinese Financial Crisis, the 2018 Trade War, the 2018 Economic Growth Slump, the paradox of a communist society with great income inequality, and the increasing dissatisfaction of the Chinese youth with the economic injustices have led Xi to conclude that a more robust, unified social cohesion is required to hold the nation together in case the economic growth falters (as this would be a sign of the CCP breaking the unwritten, unspoken social contract).

The refocus on social cohesion and shared culture falls under “Common Prosperity.” It has materialized in different ways, from the crackdown on video games and entertainment celebrity worship to the plans for cultivating masculinity in schoolboys. Furthermore, there’s an ongoing discouragement on exposing Chinese youth to international culture, including banning foreign teaching materials. Xi Jinping wants the Chinese youth to show nationalistic virility and become patriotic, productive citizens. He utilizes a mix of paternalistic, Confucian, and Leninist morality.

The Common Prosperity goal is positioned as completing Deng Xiaoping’s economic strategy of “first some get rich as a shortcut to achieving common prosperity.” Xi, therefore, places himself above Deng Xiaoping, as he aims to achieve what Deng couldn’t.

While Xi no longer cares about the billionaires, he does understand that private enterprise is not only a key driver for the economic growth engine but also an important source of wealth distribution

  • Primary: market wages
  • Secondary: state spending
  • Tertiary: (forced) philanthropy

Prioritize national self-sufficiency over the benefits of open international exchange

The desire to ensure national self-sufficiency mirrors Mao Tse-tung’s obsession to eliminate all vulnerabilities to any pressure from the outside world. The desire to achieve self-sufficiency goes hand in hand with the vision of a dual-circulation economy.

The dual-circulation strategy is a conscious reversal of Deng Xiaoping’s “great international circulation.” It aims to increase economic growth mainly by (1) meeting consumption demand from the growing domestic middle-class (internal circulation) and (2) transitioning the global economic engagement from labor-intensive, low-wage manufacturing for export to high-value imports and exports (external circulation).

The desire for self-sufficiency and the transition away from low-wage manufacturing is best exemplified by the Made in China 2025 national strategic plan.

Where China cannot be self-sufficient in the short term, Xi aims to diversify its economic engagements to minimize the power of a single trade partner. That primarily means economic decoupling from the United States. The economic decoupling debate centers around five main topics: trade, investment, technology, capital, and currency.


  • China aims to be less reliant on export for GDP growth and shift focus to domestic consumption
  • China aims to reduce the relative importance of the US for export while staying the most important import partner for the US. It will diversify its export to European Union, Japan, Korea, Indonesia, Southeast Asia, and Belt-and-Road Initiative countries.
  • China has signed Regional Comprehensive Economic Partnership (RCEP) and is an applicant to the Comprehensive Progressive Trans-Pacific Partnership (CPTPP)

Foreign Direct Investment

  • China aims to further reduce reliance on US FDI, even though FDI as a whole is still relatively small in China. For example, by increasing FDI with European Union through the China-Europe Comprehensive Agreement on Investment (CECAI)
  • China accepts (temporary) market reforms and the entrance of international competition in specific industries where it sees a need


  • China missed out on the first three industrial revolutions (fossil fuel, electricity, digital) and aims to be the first mover of the fourth revolution (artificial intelligence)
  • Made in China 2025 + New Generation Artificial Intelligence Development Plan
  • Key battlegrounds: data for algorithm development, advanced semiconductor manufacturing, and commercial application

Capital Markets

  • US and China capital markets are too intertwined to suggest east decoupling
  • China is still eager to have access to the large US capital market, whereas the US is taken active steps to prevent China from access


  • Maintain the managed float of the Renminbi as a tool to help achieve economic goals
  • Limited role of the Renminbi as global currency due to refusal to open the country’s capital account and free float. While the RMB is part of the IMF SDR basket, only 2% of global reserves are currently held in RMB
  • China aims to have a first-mover advantage in the digital space with the international digital RMB, becoming the preferred reserve currency in the developing world (as opposed to the US Dollar). The ultimate goal is that the international RMB is the basis of geo-financial and geopolitical power to protect China from external pressures

#4 – Environmental Sustainability

Everyone’s aware of the high environmental cost of China’s rapid economic growth in the past third-five years. So are the Chinese. Over the past decade, there’s been an increasing demand from the Chinese to have a clean environment as part of the unwritten, unspoken social contract between the Chinese Communist Party and the Chinese people.

Three overarching core strategic interests of the CCP drive the necessity to focus more intensely on environmental issues.

  1. The ability to which the party can provide a clean and sustainable environment for the people adds or subtracts to the political legitimacy of the ideology
  2. A rising global focus on climate change can put China in a vulnerable position; thus, it’s in the party’s interest to safeguard the country from any political or economic impact of climate change
  3. The party can legitimately position China as a global citizen or even global leader if its success with its Green Belt-and-Road Initiative after the abandonment of coal diplomacy in 2021

The party realizes environmental devastation threatens the future of China’s economic development and, ultimately, national security.

Furthermore, the party realizes that the absence of the United States at the forefront of the climate change debate provides two opportunities. One, it puts China in a favorable negotiation position vis-à-vis the United States. Two, it helps demonstrate China’s capability for global leadership.

#5 – Modernizing the Military

Military power is fundamental to ensuring domestic security and projecting global power. Under Xi, China aims to become a “peer competitor of the United States in all areas. This shall guarantee that:

  1. The perceived historical failure of the Red Army to step in against the anti-communist revolution in the Soviet Union will not be repeated in China
  2. China cannot be forced by the United States in any arena or dispute
  3. China can use its ability to provide security through its military power as leverage with third-party nations, similar to the United States

Under Xi, the military has undergone a distinct modernization. China now sees informationized warfare as the fundamental condition for the successful prosecution of modern warfare.

Under Xi, the original time plan for achieving a “world-class” military has been brought forward from the original 2035 target to 2027. Bringing forward the date may hint toward an early military attack on Taiwan or may just be a way for Xi to encourage military leaders to show more decisive leadership.

The term “world-class” is defined explicitly in Chinese strategic literature as one that can compete effectively with any world-class adversary overall, possessing a strength and deterrent capacity to match them. It implies the military should have transregional and transcontinental force delivery capabilities.

A critical part of addressing the challenge of informationized warfare is the establishment of the PLA Strategic Support Force (PLASSF). The PLASSF is a regional command structure for strategic support which integrates all of China’s space, cyber, reconnaissance, and electric warfare capabilities.

Under Xi, the ground force (PLA) has been reduced in size and budget. It has three priorities: supporting an amphibious assault on Taiwan, dealing with threats in China’s western theatre (i.e., India), and dealing with domestic and foreign terrorist threats.

Contrary to the ground forces, the PLA Navy (PLAN) has significantly increased in size and budget. That’s only logical considering China sees the next major threat coming from the sea rather than land. This includes conflicts in the East China Sea, South China Sea, Taiwan, and access to the Pacific.

The PLA Air Force (PLAAF) has also increased in size and number, primarily to support its naval activities.

Xi also created a new PLA Rocket Force (PLARF), which integrates China’s nuclear and rocket capabilities. Its goal is to become the fourth force on equal footing with the ground, air, and naval forces.

Under Xi, China’s nuclear policy has shifted from “minimum deterrence” (to avoid Soviet blackmail) to rapid expansion (in case of scalation with the US). Its operational policy has also shifted from “no first use,” meaning to launch a nuclear weapon after surviving a nuclear attack, to “launch on warning,” meaning to launch a nuclear weapon as soon as a likely nuclear attack is detected.

Additionally, China does not clearly understand the United States’ redlines concerning nuclear warfare. Also, considering its limited nuclear arsenal, China is uninterested in discussing arms control with the US and Russia.

China’s defense operations are centered in the Central Cyberspace Administration Commission (CCAC). Its forces are split across three main agencies: PLA, Ministry of State Security (MSS), and Ministry of Public Security (MPS). The PLA focuses on military network warfare. The MSS focuses on gathering any type of military or civilian information. The MPS focuses exclusively on domestic affairs.

China’s military space program falls under the direct control of the Central Military Commission (CMC), and its operations are directed by the PLASSF.

The current evaluation of the overall US-China military balance is that China is closing the capabilities gap faster than anticipated. China is stronger closer to its shores, and strength declines as proximity to the mainland increases. However, this may change in the near future.

In simulated war games, the US is losing a battle over Taiwan in multiple scenarios. That gives China increased confidence should it see military intervention as necessary. The balance is unclear in the East China Sea against Japan and the US. Therefore, China will likely pursue a less aggressive road in the short term. In the South China Sea, where the US has no treaty obligations other than the Philippines, the balance clearly favors China, hence its continued aggression.

China also has the advantage that its form of central, authoritarian government can marshal the complete economic resources more easily.

China’s primary challenge to continued military modernization is budgetary. The military budget is already 10% of the overall budget. Thus further increasing is difficult. Furthermore, China’s budget is heavily reliant on proceeds from a continued fast-growing economy which is under pressure after a shift away from private enterprise.

Additionally, China may have awakened the American bear from long strategic hibernation with its recent actions.

Lastly, due to the limited recent real-world battle experience, it remains unclear whether the Chinese military is capable of fighting and winning wars.

#6 – Managing Neighboring States

China’s core strategic interest today is to reduce and eventually eliminate any significant threats along its border. Its strategic approach has been influenced by a careful study of the history of America’s Monroe Doctrine and its “spheres of influence” concept. Since the late 1980s, China has looked to modernize its policies toward its neighbors, prioritizing economic growth and culminating in the 2003 Good Neighbor Policy.

The Great Wall of China represents a historical recognition that defense along the border is fundamental for national security. However, while the Great Wall protected China from land invasions, it did not prevent the series of sea invasions from bringing the century of humiliation. This historical awareness is reflected in China’s military transformation under Xi.

China also has the modern understanding that national security is not just a matter of military preparedness but also requires political and economic diplomacy. China aims to develop and maintain positive and accommodating relationships where possible and compliant relationships if necessary.

A brief overview of China’s current relationship with its neighbors:

Russia is a “useful strategic asset” as China sees itself as the superior force but presents itself and treats Russia as its equal. The main driving force of the relationship is the personal relationship between Xi and Putin. Being on good terms with Russia is essential for China as it provides security on its Northern border, allowing it to focus on its Western and Southern borders.

India is a “problematic neighbor” as the border disputes remain a fundamental source of ongoing struggles. While bilateral relations improved during the Trump administration as countries were looking to hedge against the demise of the US, recently, US-India relations have improved again. While initially hesitant, now with more conviction, India is also a member of the Quad. The Quad is a strategic security dialogue between Australia, India, Japan, and the United States to counterbalance Chinese security domination in the Indo-Pacific region.

Japan is a “problematic strategic neighbor” as it’s a US-allied force in the East China Sea and is increasingly strongly aligned with democratic Taiwan. There is also an ever-present historical backdrop of the Japanese atrocities in China during the Second World War. During the Trump era, Japan sought to normalize relations, notably regarding managing the North Korea threat, but China misplayed its hand. Now relations are again deteriorating due to China’s diplomatic errors.

North Korea is an “all-weather ally” because it is a neighbor that will always be there. China has supported North Korea despite Xi and Kim’s difficult relationship. The Trump admin’s actions toward North Korea gave China a surprising opportunity to position itself on the international stage as a global leader.

South Korea is a “historic good neighbor” because of its shared cultural heritage and similarities. China believes this shared heritage will, over time, bring South Korea back within its direct sphere of influence. There’s a generational change in South Korea that feels less emotionally connected with the West post-Korean civil war. The pull of China’s economy, the growing anti-Japanese sentiment, and the recognition that China does not support armed reunification of the Korean peninsula have pushed South Korea in the direction of China.

Laos is a “Chinese satrapy.”

Cambodia is a “Chinese satrapy.”

Thailand is a “soon-to-be-former US ally” as its relationship with the United States has deteriorated after the 2014 US sanctions following the military takeover of Bangkok.

Myanmar is a “continued good neighbor” as China practices a pragmatic diplomatic approach with the changing government. The 2021 military coup was an annoying setback to the relationship after China had invested significantly in building the relationship with Aung San Suu Kyi.

Vietnam is an “open play neighbor” as it’s hedging its geostrategic bets against either China or US security risks. The relationship between Vietnam and China will always be against the historical backdrop of the border war of 1979.

Malaysia is a “good neighbor” with which China has normalized relations after a series of controversial Belt-and-Road Initiative projects

Singapore is an “open play neighbor” as it is a military partner of the United States. But after a formal reset of diplomatic relations in 2018, it is more sensitive to Chinese interests.

The Philippines is an “open play neighbor” despite being a formal US treaty ally. The Philippines is constantly re-aligning and re-positioning itself towards China and the United States to both benefits economically from China and maintain its historic security ties with the United States.

Indonesia is a “crucial neighbor” as it’s the main strategic battleground between the United States, China, Japan, and Australia for strategic influence and access to the South China Sea. The Indonesian government prioritizes economic development for its large, growing, tech-savvy population over military security support, which plays in the hands of China. China sees a great opportunity in closer collaboration with Indonesia and even offered it a seat in the BRICS grouping.

Xi identifies three mega-trends that are moving Southeast Asia steadily in the direction of China:

  1. The size and proximity of China’s economic footprint in the region provide an excellent incentive for SEA countries to, at the very least, maintain positive diplomatic relations with China.
  2. China’s strategic shift in the South China Sea from aggressively pursuing its sovereignty claims to prioritizing diplomacy based on joint economic development has alleviated some sources of hostility from SEA countries.
  3. Post-Obama, the United States has been largely missing militarily, politically, and economically from the region. Especially after it abandoned the Trans-Pacific Partnership (TPP) free trade agreement.

#7 – Securing China’s Maritime Periphery in East Asia & West Pacific

Whereas China considers the continental periphery “problematic,” it sees the maritime periphery as outright “hostile.” This view is, of course, rooted in the experience of the past 180 years where China remained exposed to Western aggression from the United Kingdom and France during the Opium Wars, Japan between 1895 and 1945, and the United States preventing China from taking back Taiwan.

China sees the region as strategically aligned against China; therefore, its primary objective is to fracture US alliances. America, without its alliances, would be considerably weaker. China claims these military alliances are a relic of the Cold War.

A militarily-politically weakened United States would yield sufficient doubt in American commanders about the possibility of winning an outright war against China. In China’s eyes, this doubt would cause the United States to simply not enter a war, even if provoked. Not over Taiwan, not over territorial claims in the East China Sea, not over territorial claims in the South China Sea. This fits nicely into Sun Tzu’s expression, “The supreme art of war is to subdue the enemy without fighting.”

Eventually, China aims to displace the United States as the dominant force in the Asia-Pacific region and push back US forces beyond the second island chain.

China uses two main tools to achieve this objective.

  1. Grow its military force such that, if needed, it can overwhelm the United States and their allies
  2. Leverage the economic appeal of the Chinese domestic market to build diplomatic relationships that undermine American leverage

One response from the West is the Quad. The Quad is a strategic security dialogue between Australia, India, Japan, and the United States that aims to counterbalance Chinese security domination in the Indo-Pacific region.

The Quad’s mantra is “to advance a free and open Indo-Pacific. Its spirit is “to strive for a region that is free, open, inclusive, healthy, anchored by democratic values, and unconstrained by coercion.”

There’s also a Quad+ which includes South Korea.

Despite a rocky start in the mid-2000s, due to changing strategic circumstances in the region, the Quad has revived since 2017. Since 2017, the Quad has evolved from an informal framework of cooperation to discuss regional security to, possibly, a future institutionalized security framework.

China’s response to the Quad has changed several times from initially marginalizing the forum as nothing more than a “headline-grabbing idea” to a “small clique aiming to start a new Cold War” warranting full-scale political attack.

Most recently, China has again pivoted on the Quad topic away from efforts to attack its members (“kill one to warn one hundred”). China now focuses on deepening strategic interactions with ASIAN countries through RCEP and CPTPP trade agreements. Essentially, the strategic aim is for China to “go bigger” than the Quad to preserve its regional influence.

A brief overview of China’s current relationship with its South Pacific neighbors:

Australia is a “pro-American neighbor,” which China sees as a middle-rank trade and investment partner. China is primarily targeting Australia to dislodge the Quad and reduce the US influence. However, it is met with significant pushback. This eventually resulted in a currently very strained relationship.

New Zealand is “America’s soft underbelly” in the Pacific as in the 1980s, it severed its post-war alliance with US and Australia. New Zealand was China’s first free trade partner in the developed world. However, New Zealand has deep historical and cultural ties with Australia. It has somewhat reluctantly joined the cause to oppose China’s punitive actions against Australia. Nevertheless, New Zealand is looking to increase defensive cooperation with China stating China is now firmly part of the international rules-based order.

Pacific Islands are “strategically important partners” for multiple reasons. First, the microstates historically have been politically aligned with Taiwan. Breaking the alliance weakens Taiwan’s international diplomatic status. Second, the microstates control a vast area of mineral and energy reserves that China wants to access. Third, it also has significant-sized fisheries, which China wants to tap into to feed its seafood-hungry population. Fourth, it provides China with a place to develop intelligence, security, and communications facilities to monitor activity in the Pacific.

The Pacific Islands have, historically, always relied on Australia as a proxy of the United States for support. However, Australia’s recent disregard for climate change action has put a strain on the relationship. Climate change is an existential threat for the Pacific Islands as rising sea levels could submerge the nations. China sees excellent alignment with its domestic environmental and climate change challenges and is looking to leverage this political opportunity. Additionally, China always leverages the economic angle as it does in all its diplomatic relations.

#8 – Securing China’s Western Continental Periphery

Beyond Asia, Xi’s priority is to project strategic, diplomatic, and economic power across Eurasia and the Indian Ocean to reach the Middle East, Africa, and Europe. China has used several institutional tools, including the Shanghai Cooperation Organization (SCO), the Conference on Interaction and Confidence-Building Measures in Asia (CICA), and of course, most recently, the Belt-and-Road Initiative (BRI).

The BRI consists of a trans-Eurasian Silk Road Economic Belt and a Maritime Silk Road across the Indian Ocean, through the Red Sea, to the Mediterranean. The BRI aims to accomplish a couple of goals:

  • Enhancing economic exchange with Europe and the Middle East
  • Securing a more benign strategic environment
  • Weening off American strategic influence
  • Stabilizing Islamic central and South Asia
  • Build up new markets to mitigate any potential future economic threats from the United States

The United States has recently pushed the Build Back Better World (B3W) as an alternative to BRI. However, for many countries in the developing world, BRI provides a better option. That’s because B3W typically targets higher standards, greater governance, value-driven, and sustainable projects. On the other hand, BRI has fewer demands on good governance or financial returns and is typically the only infrastructure funding program available.

It’s almost as if China’s employing the theory of disruptive innovation to geopolitics by providing a lower-cost alternative for access to capital.

The other side of this coin is that many BRI projects are not great investments from a financial perspective, causing several major projects to default. This has put the future prospects for BRI under question domestically. It may jeopardize future projects should a slowing domestic economy put further financial constraints on China’s budget. That said, within the Chinese framework, the “current leader cannot be wrong,” meaning moderating investments is the only likely course of action.

While BRI is an important economic framework, it does not represent the majority, let alone the totality of Chinese efforts.

BRI Central Asia

In Central Asia, security is the highest priority for China, given it may be a source of extremist support for the Muslim Uyghur. China’s leading BRI partner is Kazakhstan

Central Asia is an important new market for Chinese construction and infrastructure companies as the domestic demand slows.

China carefully balances the BRI framework against the Russian Eurasian Economic Union (EEU). Fortunately, it has developed a great sense of diplomatic touch and accommodates Russia’s sensibilities in the region. Furthermore, Russia and China have a shared concern over the long-term Islamization of the wider region.

BRI South Asia

Pakistan is China’s all-weather leading BRI partner in South Asia. It has a great interest in preventing the country from becoming a failed state following the economic decline and political instability. Furthermore, it is also concerned about further Islamizing Pakistani politics and preventing it from becoming a breeding ground for radical Islamist groups supporting the Uyghur population.

The China-Pakistan Economic Corridor (CPEC) is the main economic development plan, with the Port of Gwadar as the endpoint. Via CPEC, China aims to assist Pakistan in building energy, road, port, industrial, and telecommunications networks to support the rest of the BRI network. The Port of Gwadar is available to China on a 40-year lease. It will serve dual use of commercial and military purposes.

China’s main concern is that the region is notoriously unstable. So far, the Pakistani government has not been able to sufficiently guarantee the safety of CPEC investments.

Afghanistan is an even more problematic situation for China. After the chaotic US retreat, China is left by itself to help stabilize the country. However, China has a long-standing policy of non-interference. That implies respecting the sovereignty of any government and prioritizing cooperation regardless of ideology or politics. However, it is a national security concern to not have Afghanistan become a home base for Xinjiang separatists.

Therefore, it is uncertain how far its political and military engagements should go with the sovereign governments and Russia to ensure regional security and stability.

BRI Indian Ocean

The Indian Ocean is of primary national security concern, given that 80% of China’s oil imports pass through the Strait of Hormuz and the Strait of Malacca. To ensure security, the PLA has developed China’s “string of pearls, ” a series of ports across the Indian Ocean to support the long-term projection of Chinese naval power. These pearls are located in Bangladesh, Cambodia, Djibouti, Myanmar, Pakistan, and Sri Lanka.

With this approach, China is emulating the US playbook of rolling out a global network of port facilities and airfields capable of supporting a blue-water navy.

So far, partners have been very accommodating to China’s needs.

BRI Middle East

China is challenging and supplanting the United States as the region’s most important external power. However, China has no interest in replacing the United States as the principal external power.

Its principal concern is to secure its long-term energy supply. To do this, it has set up major joint venture investments across the region. Fortunately, the Gulf states are aware that business with the United States is declining due to domestic fracking. Therefore, China is becoming a more important buyer. It has also invested significantly in the high-technology industry (e.g., Israel) and the financial sector (participating in wealth funds)

As usual, China leverages its economic power to build and strengthen diplomatic relationships. But China’s non-interference foreign policy has also proven exceptionally successful in this challenging region. It has built friendly relationships across the region by constantly trying to distance itself from regional disputes and not taking sides.

Xi has successfully outflanked the United States in the Middle East at virtually every turn:

  • It has leveraged its economic strength and buyer power to secure better deals for its future energy needs
  • It has leveraged its economic strength and supplier power by providing access to Chinese goods, including military equipment
  • It has leveraged the region’s need to balance the reduction of US exports
  • It has leveraged the US’s poor handling of regional conflicts in the past decades
  • It has leveraged its non-interference foreign policy to make friends with states who are enemies (“the friend of my enemy is also my friend”)

The question remains whether China can continue its non-position-taking policy when binary choices have to be made in the future.

#9 – Increasing Chinese leverage across Europe, Africa, Latin America, and the Arctic

China’s global strategy is to increase its economic, foreign, and security policy influence across all regions. That includes Europe, Africa, and Latin America, considered important markets for Chinese goods, especially to mitigate reduced access to the American market.

Furthermore, China is always looking to secure a long-term supply of commodities and sources of foreign direct investment and capital flows.

Lastly, with its strong relations across the developing world, China can pull unprecedented political and diplomatic leverage in international institutions like the United Nations.


China has long looked at Europe through the pragmatic lens of win-win economic opportunity and engagement. This has only accelerated after the US-China trade war of 2017.

China recognizes that Europe constitutes a region with an extensive range of diverse cultures, each with a strong urge to maintain its own diversity. It has tried to leverage these differences with a divide et impera approach focused on smaller states. It aims to leverage the smaller states’ disproportional power in EU and NATO institutions to fracture unity on core questions. Examples are Hungary and Greece, but also China’s 16+1 summit mechanism.

A primary concern for China is that it sees Europe as the last remaining defender of global human rights norms. This is deeply problematic for China because it challenges the CCP’s domestic and international political legitimacy. If China could neutralize Europe’s unity on human rights, it would be a victory.

China also aims to reduce or extinguish Western confidence in the Western liberal-democratic tradition. That has been a long-term objective of the party, given it would provide a definitive answer to whether liberal democracy is the inevitable political destination for all humankind.

Europe has long sought to develop a cooperative relationship with China, culminating in the near agreement on the EU-China Comprehensive Agreement on Investment (CAI). However, this was put on hold in 2021. Europe’s concern with China is primarily:

  • China’s domestic market is still largely closed to European business, despite China’s access to European markets
  • China’s foreign direct investment into Europe is still minimal
  • China’s state-driven approach to the acquisition of technology presents national security concerns
  • The distinct difference in citizen privacy laws and their enforcement
  • National security concerns related to 5G technology 
  • China’s close collaboration with Russia and its positioning as a global security provider

Currently, there are three groups within Europe concerning the discussion on the geopolitical future of Europe.

The first group wants Europe to focus on strategic autonomy, staying neutral in the US-China struggle for global domination, and maximizing Europe’s economic opportunities.

The second group sees a crystal-clear division between the Western liberal democracies and China. It proposes aligning Europe with the United States and other Western nations against authoritarian states like Russia and China.

The third group sees nothing wrong with China’s conduct and suggests we can learn something from them. It proposes Europe should develop closer relationships with the future global superpower.

Latin America

There’s not a long history between China and Latin America, primarily due to the implication of America’s Monroe doctrine. However, since 2001 China has increased its visits to Latin America, which has only accelerated during Trump’s administration.

China’s regional interests include further diplomatic isolation of Taiwan (Panama, Honduras) and, of course, its economic interest. China sees Latin America as another excellent market for Chinese exports and a trading partner to secure a long-term supply of raw materials like oil, iron, ore, copper, and soya beans.

Xi has faced significant internal and external criticism for its support of Venezuela. The domestic criticism is that Venezuela has defaulted on a substantial quantity of loans which puts the sustainability of China’s loan strategy into question. External criticism is that many regional governments see Venezuela’s instability as a potential cause of mass immigration across the continent. However, Xi has pointed out that Venezuala is the “all-weather ally” in Latin America.

China has displayed a remarkable ability to balance the long-term strategy against short-term headwinds. A prime example is how they dealt with Brazil’s Bolsonaro. Bolsonaro directly attacked China during his 2018 presential election campaign, stating, “China is not buying from Brazil, China is buying Brazil.” Yet one year later, during a state visit to Beijing, he exclaimed the two economies were “born to walk together.”

Generally, the region has been accommodating Chinese diplomacy despite America’s warning of China as the “new imperial power.” Latin America seemingly welcomes China as a counterweight against the United States as it provides more leverage against the former sole superpower.


Africa has a long history of supporting China, rooted in Mao Tze-tung and Zhou Enlai’s leading role in the Non-Alignment Movement. African countries have never really been part of the American sphere of influence as they were mostly (negatively) influenced by the European colonial and post-colonial powers. Similar to Latin America, China provides African nations with the leverage it never previously had to stand up against European forces.

China’s economic interest in Africa is vast and deep. First, it sees Africa as a long-term energy and raw materials supplier. Second, it considers a growing billion-strong consumer market for Chinese goods in Africa.

Chinese political interest in Africa is rooted in the presence of African nations in international institutions like the United Nations. Via its diplomatic ties, Africa typically provides China a reliable block of votes in any multilateral forum whenever Chinese interests are at stake.

China’s ideological interests in Africa are to showcase its development model as superior to the West by proving the model also works in a non-Chinese setting. Xi Jinping has declared to “welcome Africa abord the express train of China’s development.” Ultimately, succeeding in China supports the global ideological ambition of delegitimizing liberal-democratic capitalism.

China’s investment interests focus on creating a win-win outcome that delivers tangible economic benefits to both parties. FDI typically comes with a lot fewer requirements than Western investment. Western investment generally has additional requirements that include the promotion of open democracy and free market mechanisms. It also requires ensurances to deliver on the promise. Even with the higher barrier to access, Western investment projects are often criticized for ineffective, strings-attached, and unpredictable investment. Despite the fewer requirements, China’s FDI still falls significantly behind that of individual European states. Furthermore, only 5% of China’s aid is from “non-loan” investments. That causes some to worry about potential debt-trap diplomacy.

China’s security interests primarily protect the Chinese citizens and investments in the region. However, China has set up a China-Africa peace and Security Initiative to broaden the security collaboration. Generally, African nations don’t seem to mind the increased presence of the Chinese military.


In 2013 China became a permanent observer of the Arctic Council. Xi declared China to be a “polar great power.” China’s primary strategic interest in the arctic appears to be two-fold. First, tapping into the energy and mineral reserves that will be unlocked by global warming. Second, the emergence of a new maritime shipping route connecting the Atlantic and Pacific oceans. For this purpose, China has invested resources into jointly developing with Russia the Arctic Silk Road


China’s ambitions in Antarctica are primarily scientific activities for now. However, it appears China is also looking at exploitation sometime in the future. This is currently not allowed under the Antarctic Treaty.

#10 – Rewriting the Global Rules-based Order

Post World War 2, the United States and its allies constructed a liberal international rules-based order, including establishing the institutions required to manage it. Below is a brief list:

1944 Bretton Woods Conference

  • IMF = International Monetary Fund
  • WB = World Bank
  • GATT = General Agreement on Tariffs and Trade (later WTO)
  • WTO = World Trade Organization

China was present at the Bretton Woods conference but represented by the Nationalists under Chang-Kai Shek and not the communists. Russia was also present but refused the ratify the agreements stating they were mere “branches of Wall Street” and opposed the communist ideology.

1945 San Francisco Conference

  • UN = United Nations

China and Russia were present as inaugural members of the United Nations, with both having a permanent seat in the UN Security Council.


  • UDHR = Universal Declaration of Human Rights
  • NATO = North Atlantic Treaty Organization

China, under the CCP, had always claimed it wasn’t included when the rules-based order was set up. Until recently, it was not in the position to challenge these rules, but now it is. China prefers the rules-based order versus the alternative, which is chaos (e.g., revolution). Before 2014, China showed little interest in playing a more significant role in international affairs. This is symbolized by Deng Xiaoping’s expression, “Hide your strength, bide your time, never take the lead.”

Since 2014, Xi Jinping has declared a new era of Chinese multilateral activism and has said China should “strive for achievement.” Under Xi, China has three approaches to challenging the existing liberal rules-based order.

First, grow support in the developing world to secure changes to existing norms and values that are inconsistent or offensive to Chinese interests and values.

Second, increase the influence within the existing institutions by increasing funding and installing Chinese or China-friendly candidates in senior leadership positions.

Third, create its own network of new multilateral institutions outside the framework of the existing institutions. This already started before Xi with the Chang-Mai Initiative (CMI) and Asian Monetary Fund (AMF) and has accelerated with, for example, the Belt-and-Road Initiative (BRI), Silk Road Fund (SRF), New Development Bank (NDB), Asian Infrastructure Investment Bank (AIIB), Shanghai Cooperation Organization (SCO), and Conference on Interaction and Confidence-Building Measures in Asia (CICA).

Xi has been helped tremendously in all three approaches by the systematic American withdrawal under the Trump administration.

Another angle to changing the global rules-based order is one of international standard-setting and regulatory frameworks. We are familiar with the topic of 5G telecom, where China aims to set the new international standard for telecommunication by directly supporting its national champion Huawei. Other examples include replacing the TCP/IP communications network architecture with New IP. But technology is not the only sector where China aims to lead the world toward new, China-friendly standards.

Generally, China has three approaches to imposing its standards for international regulator frameworks.

  1. If possible, simply have the superior proposal
  2. If possible, have a dominant global market share within the target segment such that your framework becomes the de facto standard
  3. If needed, leverage diplomatic ties to enforce the adoption of your proposal (even if it’s not equivalent to the Western proposal)

Xi is not entirely clear on what a new order should look like but has clarified that China will not simply replicate the current US-led order. Furthermore, there is no “grand blueprint.” Instead, Xi’s process of establishing a new global order follows the typically Chinese iterative trial-and-error process.

However, it is crucial to remember that Xi is fundamentally a True Believer in Marxism. When Xi declares China is in the process of building a “community of common destiny for all mankind,” it’s important to frame this within the Marxist-Leninist worldview, which sees state socialism as a superior governing mechanism to liberal-democratic capitalism.

Practically, China will continue to work on transforming the existing global governance system and offering Chinese Wisdom as an alternative perspective.

Strategic Blueprint for Business World Domination

The strategic blueprint for business world domination is a framework to help you plan your business. Whether you’re running a small business or a multinational corporation, as a business leader it’s your responsibility to figure out how to grow sustainably. There are hundreds or even thousands of books and papers covering the topic of how to approach that challenge and this series of posts are not any different. Over the next couple of weeks and months I aim to cover a big picture strategic blueprint or framework that can help you figure out how to achieve business world domination.

Strategic Blueprint Structure

The strategic blueprint consists of 3 fundamental pillars or questions. The three questions form the essence of deciding what business you’re in, how to get the business going, and how to create a prosperous organization.

  1. What are the opportunities?
  2. How do we make it happen?
  3. How do we ensure good execution?
Blueprint for business world domination


The opportunity question is the first step in starting a business. It challenges you not only to choose an industry, market, or segment, but also clearly define what it is that makes you stand out against existing and potential competitors. The question fundamentally demands you to clearly state or outline what it is you’re trying to get done.

Many entrepreneurs and business leaders tend to skip or fast-forward the process of answering the opportunity question. An entrepreneur might find it more useful to just get started and figure out the details later, while a business leader running a successful company may think they’re merely stating the obvious. In both cases it feels natural to skip straight to the second question and start working to get it done.

However, I urge the reader to spend enough time on the opportunity question. A careful study of the business environment and thoroughly thought out business strategy enables you to focus on the things that matter the most to your business. Improper analysis and planning will come back to haunt you when it’s time to allocate the company’s limited resources.

Relevant blog posts:

  • Jobs To Be Done: Business Raison d’Etre (link)
  • Attributes and Values: Business Strategy Core (link)
  • Business Theory of Disruption Innovation (link)

Resources and Capabilities

The second question primarily deals with allocating the organization’s available resources. Traditionally we think of resources as primarily the people, technology, cash, equipment, and so on. However, it may be useful to expand this to also include the capabilities of the organization and its people.

Traditionally, when a firm expands its business scope beyond its initial product or service, a firm is organized in a single corporate unit and multiple business units. To a varying degree the business units operate independent from each other, but are linked by resources shared by the corporate. However, in today’s fast-changing and sometimes volatile marketplace, the rigidity of a corporate backbone may be too restrictive.

With this in mind, from the perspective of organizational structure I follow the idea of authors Andrew Yeung and Dave Ulrich set out in their book Reinventing the Organization: How Companies Can Deliver Radically Greater Value in Fast-Changing Markets and make a strict distinction between the corporate substrate and the business teams. While the business teams are entirely independent in striving to win in their respective markets employing the available resources, the corporate substrate ensures the teams align. You could say the substrate is the glue that binds everything together. It acts and reacts on inputs from the business teams, provides a rigid structure on the short-term but inevitably changes over the long term.

The key challenge of the resource and capabilities question is to find the right balance between business teams in the marketplace and a corporate substrate that both provides a strong structure and the ability to change over time.

Good Execution

The third and last question deals with the long-term prosperity of the organization. It challenges the business leader to think about the governance processes and leadership needed to help the firm expand the business scope.

Governance processes includes developing and nurturing the right organizational culture, motivate and hold people responsible for their job performance, encourage and support the generation of new ideas as well as foster them, attract and retain talents, the sharing of information with peers and partners, and the collaboration across the entire organization ecosphere.

The leadership challenge boils down to four words: learn, grow, change, and create.

In the coming weeks and months, I hope to provide more context with each of the topics. I will add the links to the relevant blog posts in the sections above.

A Real World Negotiation Strategy Framework


In this post we talk about the framework for real world negotiation strategy. The content of the post follows lengthy discussions with Frank Gong on the matter.

Expertise and Experience

In the real world there are two key elements to success: expertise and experience. Expertise implies a certain level of proficiency in your job or field, particularly when it comes to understanding the matter in a structural way. Typically you obtain expertise by studying a course or going to school. Experience is the skill and knowledge you build up over the years as you’re practicing in the real world.

Expertise and experience are both important in the real world. They can help you find a solution in a structured way, or come to a solution faster or more efficiently.

While it is advised to gather expertise first, then gain experience in the real world, it is not the only way to be successful. As a general rule of thumb, it’s good to have both. If you are experienced in a certain field it pays to improve your expertise further. If you have great expertise, it’s valuable to return to the field and gain experience through practice.

In this post we will discuss a negotiation strategy shared with me by Frank Gong.

System 1 and System 2 Thinking

Broadly speaking you can separate the way we think in two categories. System 1 thinking is fast, and System 2 thinking is slow.

You can conceptualize System 1 thinking as using your intuition to make a decision in a split second. It requires little to no conscious effort and is largely automatic. You may not even be aware you’re using System 1 thinking! The drawbacks is that it is strongly biased towards false positives and is often distracted by appealing narratives.

On the opposite side, System 2 thinking is slow and conscious. It requires you to focus your attention to the problem and carefully consider the implications. It is more logical and rational, therefore people like to believe they use System 2 thinking most of the time.

In real world negotiation, in particular in the business setting, it is advise to always rely on System 2 thinking processes.

Five Step Negotiation Strategy Preparation

In preparation of a negotiation, there are five essential steps

  1. Define your Target Point (TP), your Reservation Point (RP), and your Best Alternative To a Negotiated Agreement (BATNA)
  2. Improve and expand your BATNA
  3. Determine your opponent’s BATNA
  4. Define the Zone Of Possible Agreement (ZOPA)
  5. Determine the Negotiation Fit

In the next section we will cover each step more in detail.

1 – Target Point, Reservation Point and BATNA

Based on the outcome of a System 2 thinking and analysis process, you should define two key situations that may occur in the negotiation: when to agree and when to walk away. Your Target Point defines what you ideally want from the negotiation, whereas the Reservation Point defines the point you do not wish to cross.

For example, when you are buying new running shoes your Target Point may be $60 for a pair of shoes and your Reservation Point may be $80. If the listed price is $90, you may haggle with the shop owner to lower it to $60. If the shop owner drops the price to $70 you can accept the offer even though it’s not as low as you wanted.

Setting a Target Point and Reservation point helps us override the urge for System 1 thinking to take over. In the example above, it would prevent us from buying shoes we really want for a price that is higher than our reservation point.

To determine your Reservation Point, it is important to determine what is your Best Alternative To a Negotiated Agreement or BATNA. A BATNA is nothing more than alternatives to your negotation. In the example of the running shoes, a simple BATNA is to go to the store next door and look for better priced running shoes

2 – Expand and Improve Your BATNA

The best time to look for a job is when you already have one

Common wisdom as the quote above teaches us that the best antidote to the lack of a good alternative, is to always work on improving or expanding your alternatives. The better your alternatives are, the more power you will have within the negotiation. You have the power to say no, walk away and still create a win-situation.

You can ask a couple of simple questions to work on your BATNAs:

  • Can you do without any agreement?
  • What is the cost of walking away from the negotiation?
  • Are there any alternatives available?

Once you have identified the possible outcomes, it’s important to continue to work on improving them

For example: you have stagnated in your career and are looking to improve this. In first instance you may consider to negotiate a raise and promotion. If you don’t have a BATNA, four things may happen:

  1. Success: you are given a raise and promotion
  2. Partial success: you are given a raise or a promotion, but not both
  3. No success: you are denied either a raise or promotion
  4. Failure: you are let go

To avoid disappointment, or disaster, let’s consider the BATNAs in this situation.

One alternative is to consider looking for employment outside the organization. Applying for open positions on the job market gives you a good understanding and appreciation of your worth on the market. Perhaps you find a job that pays better, that is more interesting, or is closer to home. In this case, expanding your BATNA means looking for other job opportunities. Improving your BATNA means going to interviews and impressing the potential employer.

Another alternative to consider is the worst possible outcome: getting fired. If you have been in a high-paying position and saved up plenty over the years, then maybe it’s not such a bad idea to take a couple months off. However, if you have little savings and a lot of expenses then taking time of is a weak alternative. If you want to expand your BATNA with the option of taking time off, you can improve the BATNA by looking for a second part-time job.

3 – Determine Your Opponent’s BATNA

To know your Enemy, you must become your Enemy

Sun Tzu

An obvious aspect of preparing for a negotiation is to understand the position of your opponent. The best way to prepare is to think about what you would do if you were your opponent. So consider what are their Target Point, Reservation Point and BATNAs.

Thoroughly evaluating your opponent’s BATNAs gives you the advantage of knowing if their are negotiating in good faith. It will also help you determine their possible Reservation Points which will increase your power in the negotiation.

However, even though you can spend a lot of time on the analysis, be aware that you are not your opponent. There will be information asymmetry, meaning there will be things you are aware of that they are not and vice versa. Factors that you deem important may be unimportant for your opponent. Therefore beware of over-valuing information you are able to gather.

4 – Zone Of Possible Agreement

The zone of possible agreement (ZOPA) defines the virtual area between two parties where an agreement can be formed where both parties agree. Within the zone an agreement is possible. Outside this zone, an agreement is not possible. This zone is sometimes referred to as a Win Set.

Typically the ZOPA lies between the reservation points of both parties. In the example of the running shoes, the zone of possible agreement is between $70 (lowest price the shop owner is willing to sell) and $80 (the highest price you’re willing to pay).

  • $90: Target Point Seller
  • $80: Reservation Point Buyer
  • $70: Reservation Point Seller
  • $60: Target Point Buyer
  • ZOPA: $70-$80

Considering this example, it is also easy to understand the concept of a win-win negotiation. There’s a clear win for the shop owner for making a sale, and there’s a clear win for the buyer as they own a new pair of running shoes. There is a negotiation surplus

5 – Determine the Negotiation Fit

Within the context of a negotiation, it is important to aim for maximum profit. However, the negotiation usually exists within a broader context that may impact the probability of reaching an agreement. If you pursue maximum profit within the context of the negotiation, you may risk minimizing the probability of the deal going through. In which case you end up with no profit, or worse.

Having a good understanding of the broader context of the negotiation will help you determine the negotiation fit.

In the example of the negotiation for a raise and promotion, the broader context implies that in case of success it is likely you will have to continue to work with your colleagues. Squeezing your boss for every penny in the salary negotiation may leave a bad impression. That may cause your boss to be unwilling to keep you in the loop or not having your back in case a project goes wrong.

Win-Win: Distributive and Integrative Bargaining

To wrap up this post let’s return to point four of the five-step program: the zone of possible agreement. As mentioned, it is possible to create a win-win as opposed to a zero-sum situation in the negotiation. This is the difference between distributive and integrative bargaining.

Distributive Bargaining

In distributive bargaining everything is a zero-sum negotiation. That means the size of the loss of one party is the exact size of the win of the other party.

For example, let’s consider two children who are tasked with dividing 30 M&M chocolates. Any amount higher than half, or 15, for one child is the same amount of loss for the other side. This is a clear zero-sum negotiation. The optimal strategy for this kind of situation is to have one child divided the candy into two groups and allow the other child to first pick the group of choice. That ensures the division of candy will happen in good faith.

Does that mean this situation is always a zero-sum negotiation? No.

Integrative Bargaining

In integrative bargaining we come to a win-win agreement by gathering more information so we better understand the needs and desires of both parties. The size of win of one party may

For example, let’s consider the 30 M&Ms come in 5 different colors distributed equality. Child A loves Red and Black, and is neutral about Green, Blue and Yellow. Child B loves Red and Blue, is neutral about Green, and is allergic to Black and Yellow.

In a distributive agreement each child would have 3 M&Ms of each color. The final result would be that 6 candies are not eating as Child B is allergic to both black and yellow.

In an integrative agreement Child A can choose to give up 3 of their blue candies (which they feel neutral about and the other child loves) in exchange for all of the yellow and black candies (which Child B is allergic to). The final result is that both children will eat more candy.

  • Distributive Bargaining
    • Child A: 15x candy (Red, Black, Green, Blue, Yellow)
    • Child B: 9x candy (Red, Blue, Green)
    • Throw away: 6x (Blue, Yellow)
  • Integrative Bargaining
    • Child A: 18x candy (3x Red, 6x Black, 3x Green, 0x Blue, 6x Yellow)
    • Child B: 12x candy (3x Red, 3x Green, 6x Blue)
    • Throw away: 0x

Concluding thought

The main take-away from this article is that negotiations are best done by applying System 2 thinking (rational and logical) and that information gathering and evaluation is your best friend.

What Is (Good) Business (Strategy)?

business strategy image
(picture source: peterpaul.com)

“What is business strategy?” is the question that popped up this morning in my daily conversation with Frank Gong. Lacking a sufficiently succinct definition proposed by either Google or Baidu, we set out to dissect the term.


Business is the exchange of the tangible or intangible for a kind of payment. More specifically, it is the selling of a product or a service to a customer. When the demand for a product or service is larger than the supply, it is sufficient to simply have ‘business’. Make the product or perform the service and you will make money. In this case there’s no need for a strategy, let alone putting effort into finding a good strategy.

Example: a friend decided to start his own company to make electronic components with relatively low complexity. He previously made products as a hobbyist and was able to sell them to customers directly as well as a larger distributor. The distributor agreed to sell the products he is working on in his first year of business.

In this example, because the demand is already there it is sufficient to simply have business. Do it, and you make money.

Business Strategy

Sadly, in most markets and industries supply far outweighs demand. In this case, simply making the product or doing the service will not be enough to be successful. You will need a strategy to make it work.

A strategy is a specific plan designed to achieve certain goals. When forming a strategy, the firm must consider three things:

  • What are the existing and potential attributes of my product or service?
  • What are customers willing to pay some money for?
  • Which attributes do we focus on such that we are unique in the market?

Attributes can take many forms, both tangible or intangible. For example, a smartphone has tangible attributes such as screen size, camera quality, battery lifespan, operating system, storage size; and intangible attributes such as privacy, design style, after-sales customer care.

As part of the strategy, a firm must choose which of those attributes to focus on. Focus implies that the firm aims to achieve excellence for that particular attribute. It is in a sense the true north of the firm in this business.

In most cases, it is not sufficient to choose only one attribute. Focusing on only one attribute makes it easy for your competition to copy your focus and you’ll be in trouble. A firm’s unique value proposition is the unique collection of attributes that the firm decides to focus (and not focus) on.

Thus we can propose the following definition: a business strategy defines the unique set of specific attributes the firm chooses to focus on aiming to achieve superior long-term return on invested capital.

Good Business Strategy

In the previous section we talked about business strategy in general. But what sets apart business strategies? Which strategies are bad, good, great, or even fantastic?

This depends on the market.A firm’s goal is to achieve short-term revenue growth and superior long-term sustained return on invested capital. If you achieve the goals, then it means you chose a good business strategy. If you don’t achieve the goals, then it’s a bad business strategy.

Returning to the attributes, we said it’s not sufficient to simply identify those you want to focus on. It’s also important to identify those attributes the market is willing to pay some money for. Achieving excellence in an attribute no one is willing to pay for is a wasted effort and will reflect in poor long-term return on invested capital.

Of course there’s more that goes into achieving success than just having a business strategy with good potential. The business strategy success relies on the execution. A fantastic business strategy with poor execution will fail, but a good business strategy with good execution will bring some success

What’s Not Business Strategy

In the real world often people confuse business strategy with the actions, aspirations or visions of a firm. While these are not part of the strategy, they often support the formulation or execution of the strategy. A couple of examples:

“Our strategy is to expand globally” is not a business strategy, but rather a business tactic in support of the business strategy. Expanding globally only makes sense in the context of making a specific business strategy succeed.

“Our strategy is to be market leader” is not a business strategy, but rather a goal you set as an indication of business strategy success. To be market leader can be the result of a successful business strategy.

“Our strategy is to best understand our customer needs” is not a business strategy, but rather an activity that helps you better understand which specific attributes your firm should focus on. Better understanding of the customer needs will help you choose those attributes customers are willing to pay money for.