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.
What are the opportunities?
How do we make it happen?
How do we ensure good execution?
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.
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.
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.
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
Define your Target Point (TP), your Reservation Point (RP), and your Best Alternative To a Negotiated Agreement (BATNA)
Improve and expand your BATNA
Determine your opponent’s BATNA
Define the Zone Of Possible Agreement (ZOPA)
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:
Success: you are given a raise and promotion
Partial success: you are given a raise or a promotion, but not both
No success: you are denied either a raise or promotion
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
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
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.
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.
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.
“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.
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.